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A certain stock has drawn a lot of attention of the past few days. Why? Probably because the stock has risen 23,066% in one month.
Impressed? Don’t be.
Many are calling the one month explosion of CYNK Technology Corp (OTC: CYNK) stock the ultimate sign of a stock market bubble.
The company has no revenue or assets. It has one employee who is listed as the CEO, President, Treasurer, Secretary and its only director.
The stock traded at $0.06 per share on June 17. Yesterday, the stock closed at $13.90 per share. In less than a month, CYNK went from being a $17 million to being a $4 billion company.
Is CYNK proof that a stock market bubble is hiding in plain sight?
As a penny stock run amok, I’m inclined to think that this story is more about a “pump and dump” scam being run by company insiders or major shareholders and less about a market bubble.
But this episode of stock market mania begs the bigger question about a market bubble.
Certainly David Einhorn thinks many tech stocks are in a bubble right now. He cites the abandonment of traditional metrics – like revenue and cash flow – in favor of sham metrics – like average monthly users and total addressable market.
In the Dot-com bubble that burst in 2000, high quality stocks sunk along with low quality names. The old market adage “a rising tide lifts all boats” is certainly true in reverse, and a market crash will affect quality stocks as well.
Einhorn specifically noted that Cisco (Nasdaq: CSCO) fell 89% and Amazon (Nasdaq: AMZN) fell 93%. The Nasdaq Composite index fell by almost 80% during the crash. 15 years later the index still hasn’t surpassed its Dot-com bubble highs.
Even the S&P 500 fell by around 49%.
ExxonMobil (NYSE: XOM) fell more than 13%, despite the fact that buying and selling gasoline has nothing to do with the Dot-com frenzy of the period.
LinkedIn (Nasdaq: LNKD) is no doubt a quality company that offers a valuable service to businesses, job seekers and professionals. But with no earnings there is no PE ratio for LinkedIn. The forward PE provided by Nasdaq.com after Thursday’s close was 2,659.33.
As a stark contrast, the forward PE of ExxonMobil is 13.26. Even Microsoft (Nasdaq: MSFT), a tech stock, has a forward PE of 15.49.
Social media darling Twitter (Nasdaq: TWTR) doesn’t have a PE or even a forward PE since it doesn’t make money now and isn’t expected to make money next year either. But investors have inflated the value of the company to $22.3 billion.
Yelp (NYSE: YELP) also isn’t expected to make money next year so it doesn’t have a PE or forward PE. But investors somehow think it’s worth $5 billion.
Facebook (Nasdaq: FB) has real earnings but is still expensive. Its PE is 82 and its forward PE is 55.53. Plus, Facebook paid $19 billion for WhatsApp. If WhatsApp turns out to worth considerably less than that – a very likely possibility – then Facebook’s valuation is even less attractive.
Sky high valuations can certainly be found beyond social media stocks.
Elon Musk’s Tesla Motors (Nasdaq: TSLA), a stock I owned until yesterday, trades at a forward PE of 2,788.25.
If there is a stock market bubble it is likely isolated to one or a few sectors.
But if that bubble pops it will likely pull everything down with it, even completely stable and unrelated stocks like ExxonMobil.
I have mixed feelings about the stock market bubble theory.
Surely there are areas of the market where valuations have gotten completely out of control. Certainly social media stocks and certain tech stocks are in that group. But with the PE of the S&P 500 index at 19.48, I don’t believe the market as a whole is overvalued.
Jay Taylor owns shares of Amazon.
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