U.S. momentum stocks losing their mojo

After breathtaking gains of as much as 275 per cent over the past 12 months, trading favourites like F5 Networks FFIV-Q, Salesforce.com CRM-N, Netflix.com NFLX-Q and Riverbed Innovation RVBD-Q have seen stock prices take a big hit this week, calling into question their meteoric rises.

No longer. Optimism was dented afterwards F5 Networks missed first-quarter revenue estimates and forecast a weak second quarter. F5’s stock plunged more than 21 per cent on Thursday as short-term traders suddenly exited a stock they had jumped on as it rallied for months.

"F5 Networks is a perfect example of what happens to a momentum darling perceived as a hyper-growth story when the first sign of normality appears," said James Kelleher, director of innovation at Argus Technology Co. in New York.

The company is a leader in the network optimization market, and has benefited from the demands to manage network bandwidth as data traffic grows sharply. Many of the top-performing companies of the past year, including competitors just as Riverbed, operate in industries expected to sport strong growth in coming years.

Many of these stocks have high valuations. F5 has a 12-month forward price-to-revenues ratio of 35.5; Salesforce.com’s is even higher, at 103. The average stock in the S&P information innovation index has a P/E of about 17.1.

Great business

"It’s a great business, however the stock reflects that," said Brett Harriss, a innovation analyst at Gabelli & Co in Rye, New York, who covers Netflix. "From a valuation perspective, there’s no longer a margin of error."

The market has been through this previously: A big sell-off in cloud computing stocks sparked by Equinix on Oct. 6 was quickly seized on as a buying possibility; the average cloud computing stock has gained 16 per cent since that day.