Stock market investors have seen some of the highest fliers on Wall Street plummet recently. In 10 days, Chipotle (NYSE:CMG) stock has lost 10%. Yoga pants merchant Lululemon (NASDAQ:LULU) has lost 20% in the same period. And then there’s Netflix (NASDAQ:NFLX), which has given up 50% in 15 days.
And those losses in CMG, LULU and NFLX were just as of the closing bell Friday. By the time you read this, it’s probably going to be much, much worse.
Other cult favorites have been slammed, too. Priceline (NASDAQ:PCLN) is off 15% in 15 days — three times worse than the S&P’s 5% slide as of Friday’s close. The brains behind Apple (NASDAQ:AAPL) gadget semiconductors, ARM Holdings (NASDAQ:ARMH) is off 11% in the same period. The list goes on.
Some investors might think the bellyflops of these big-name stocks is a sign that we are in for an ugly October. But many of these big-name stocks have been deservedly sold off. Yes, there is widespread market uncertainty right now — but there is no mystery behind why some of these companies have stumbled.
Most of these fashionable names that flopped fit into either of these two important categories:
The Specific Stock’s Outlook Has Significantly Changed
Netflix is the poster child for a stock that has been sold off based on company-specific news. First, NFLX loses 1 million subscribers after a dual-pricing model split DVD and streaming sales. Then Netflix CEO Reed Hastings makes a half-hearted apology that only throws gasoline on the fire. With the looming expiration of its Starz deal and competitors smelling blood in the water, it wouldn’t have mattered if the market was moving up. For these reasons and more, Netflix was destined to make a sharp move down.
Investors Finally Realized the Stock’s Outlook Was Never Good to Begin With
Chipotle has been driving me nuts for months. Its forward P/E is a nosebleed 35. Almost every ingredient the company uses is suffering rampant inflation — for instance, nationwide beef prices are up 8% to 9% in 2011. There are no menu innovations or promotions to spur growth — just opening more stores, something reminiscent of cult restaurant stocks Krispy Kreme (NYSE:KKD) or Starbucks (NASDAQ:SBUX), both of which hit walls after overexpansion. There is no emerging-markets footprint for Chipotle — the company only branched beyond North America about a year ago with the opening of a London location in May 2010. While companies like McDonald’s (NYSE:MCD) are well-oiled food manufacturing machines, Chipotle hasn’t even heard of portion control to protect margins. A 900-calorie burrito is hardly health food and an $8 lunch is hardly a bargain given the popularity of value menus at competitors. I could go on, but hopefully even if you disagree with some of these facts, you can understand why many investors have decided to get out while the getting is good. Chipotle still is up more than 70% in the last year over its recent dip — but frankly, I wouldn’t be surprised to see more stockholders running for the exit even if the broader market stabilizes.
It’s a cliché, but it’s true: This is a “stock picker’s market,” and the only trades that are going to give you good returns are the ones that stand strong on the merit of their own particular businesses. It’s not as easy as picking a sector or a big name. You have to do your research and really look at the numbers to find the quality in this market.
If you do your research on some of the cult favorites that have crashed lately, I think you’ll agree: The numbers just don’t support gains. That means even if the market stabilizes or moves upward, these trendy names could be left even farther behind.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
