5 bubble stocks that can leave you behind, while the rest find their exit.
I am impelled to write this as a warning that much of the market is in bubble territory. The unfortunate reality is those who benefit from these bubble’s inflation are rarely the same ones as those left holding the bag. In the past it has been institutions who ride the bubble up and pass off the high priced shares to inexperienced investors for the ride back down!
Before moving forward to what stocks I see are in bubble territory, let’s understand what a bubble is first. I like to always give that backdrop knowledge so people understand as we move forward. Similar to how on YouTube I always look back at history to speak on current issues.
I feel like most common knowledge is that a stock market bubble is just an extreme overvaluation. This is a understandable viewpoint because these stocks are in fact extremely overvalued, but there’s more than just that. A bubble and the thought pattern which allows it to form is a fundamentally different concept than overvaluation.
When it comes valuation there are some fully qualified, market analysts that often come up with different fair valued numbers which these can frequently be as much as 40-50% different. Maybe one market analyst thinks it will grow at a compound annual growth rate (CAGR) of 3% while the other thinks it will be at 5%. When combined with different discount rates due to differing perceptions of risk, this can result in widely different fair valuation estimates.
These sorts of discrepancies in outlooks result in overvalued and undervalued stocks depending on where the market consensus lies relative to the reasonable range of expected outcomes.
A bubble is not caused by the market being optimistic on assumptions. Bubbles are caused by fundamental different thesis in which the view is that
“Y stock†will take over the world. What do I mean by this? Let me just give a few examples…
* Marijuana will replace alcohol and tobacco as the recreational drug of choice.
* Gyms, calisthenics, and going for a jog will be replaced by a digital workout platform.
* Plant based meat will replace animal meat.
* Home sharing will replace the hotel industry.
* Space travel will become the new logistics platform.
* Space tourism will displace beach, mountain, cruise vacations.
* Marijuana will replace a large portion of modern medicine.
Bubble stocks require changes at a level that’s the economic equivalent of the laws of physics. The extremity of these stock prices requires a wave of change in consumer behavior and even in some cases changes to international and National laws.
I don’t mean to suggest that all of these stocks are headed to zero. In most bubbles there are going to be some winners, look at Amazon AMZN in the year 2000…which participated in the famous dot com bubble, it too had a very bubble style “take over the world†theory. Now results like Amazon which actually did end up causing a disruption in the world are very rare and those who took place did extremely well if they played their cards correctly. The problem, and why a bubble is so dangerous for the overall health of a market, is that all of these valuations are based on a hypothetical total addressable market. Even when or if the potential disruption happens there are often no way to ensure that the disruptor is the one who captures the value.
Now that we understand bubbles on a different level, let me tell you the 5 bubbles that have captured my interest.
1. Airbnb (abnb)
2. Uber technologies (Uber)
3. DoorDash (dash)
4. Zoom technologies (zm)
5. Aphria/tilray (apha & tlry).
These are the top 5 bubble territory stocks that I’d be careful with , you don’t want to end up the bag holder here. A lot of these companies do not even operate at a positive profit from their companies earnings. They’re propped up on venture capitalist’s money. If you’re interested in a deep dive into these 5 stocks that I’d watch out for leave a like and a comment saying “let’s hear it,†and I’ll go ahead and do a part two breaking down these stocks for you guys.