The reckoning that’s going on in high-valued, former momentum stocks is continuing and if the trend continues, there should be some very good trades to be had.
One sector of the stock market that’s been consistently hot until recently has been the 3D printing area. It’s recent cooling off is not because these stocks aren’t still growing like mad, but that the marketplace decided to book some profits from the group.
3D Systems Corporation (DDD) has been one of the best-performing companies within the sector. The stock is up 10-fold within the last four years. It was up almost 20-fold since the position began breaking down in January.
Stocks like this—strong momentum plays among institutional investors—are very much worth following, because they are indicative of the sentiment among big money pools.
The stock broke its 20- and 50-day moving averages in January and has been in a sustained downtrend ever since.
At some point, this position is going to level out and the business is still growing. There’s going to be a buy low/sell high trade available at some point. But that is the $64,000 question. 3D Systems’ stock chart is featured below:
Very often with these kinds of stocks, expectations, valuations, and “reasonableness” get way ahead of reality. According to the company, business conditions remain strong. But stocks can still go down significantly if the numbers don’t beat the hype, and that’s exactly what’s going on with this position.
The Rock Hill, South Carolina company said its 2014 first-quarter revenues grew 45% to $148 million. By any standard, that is exceptional growth. (The Street’s average estimate was around $145 million.)
Management reported across-the-board comparative quarterly growth in all its operating sectors: 3D printer sales were up 53% to $61.0 million; printer materials were up 41% to $40.0 million; services were up 38% to $47.0 million; healthcare sales grew 53% to $22.0 million; and consumer sales were up 150% to $10.0 million.
The company’s operating expenses have been climbing and management is investing a lot into new research and development. They’ve also been making acquisitions and the first quarter’s bottom line got light because of it. Earnings were actually down comparatively to $4.88 million from $5.88 million; the Street wasn’t too pleased about that.
But so many corporations aren’t investing in new operations; they are returning excess capital to shareholders in the form of dividends and share repurchases. The only way to create innovation is to spend money, and 3D Systems is doing that.
Many speculative stocks got the wind knocked out of them recently, and it was well deserved. (See “Former Momentum Stocks Signpost to Sell?”) I’d keep an eye on stocks like 3D Systems near-term, as the position’s downtrend could very well create an attractive entry point for new positions.
This is still an industry and technology in its infancy. The company has a ton of money in the bank and little debt.
Investor sentiment in stocks sure has changed this year and market leadership is going back to the safer names. 3D printing technology is still very much a growth business, and while prices are catching up to reality, future prospects remain excellent.