Momentum Stocks Update (PCLN, SBUX, CMG)

With stocks falling and fears rising of another summer swoon, it seems prudent to look at momentum stocks to see what they are indicating. Three of the biggest momentum stocks of the past few years, Priceline PCLN, Starbucks SBUX, and Chipotle CMG, have fallen sharply from their respective highs. So where are these stocks going and what catalysts exist in the near future for each of them to potentially propel them back higher?

Priceline recently reported earnings that beat expectations by 8.4%. As oil prices fall, Priceline may actually benefit, because ticket sales might go up as prices fall. If the volume increase can outpace the fall in prices, Priceline will definitely continue to perform. With lots of cash and little debt on the balance sheet, Priceline should continue to grow by being nimble and being able to adjust to changes in the travel industry. A real risk to Priceline is the euro however, as their main growth segment, European bookings, is priced in euros and has to be passed through to dollars. A weaker euro thus hurts the bottom line through the eroded value of these bookings. The core business may continue to perform well, but factors outside of Priceline's control may be the nail in the coffin. With Expedia EXPE hitting new 52-week highs today, we may be seeing a shift out of Priceline and into Expedia.

Starbucks is up over 1% today, as Bank of America Merril Lynch upgraded the stock from hold to buy, citing that the company is well-positioned for strong earnings growth in the years ahead. With Starbucks diversifying into other businesses than just its core coffee business, it may seem attractive if earnings growth can accelerate. However, with a next twelve months P/E of 23.42x and a PEG ratio of 1.49, it is hard to see any more value here unless earnings growth picks up. Thus, the new business lines need to generate out-sized returns in order for Starbucks to churn higher. What is helping is the fall in coffee prices recently, which should at least allow Starbucks to put on new hedges for outer years where prices are expected to climb again.

Chipotle yesterday disclosed that it had been subpoenaed by the SEC in relation to an ongoing investigation into its hiring practices. The stock fell on the news and is well off of its highs from April. Similarly to Priceline and Starbucks, the stock is very rich on a valuation basis and really needs a catalyst to send it higher. With a next twelve months P/E of 35.7x and a PEG ratio of 2, the stock is in the same boat as Starbucks, overvalued unless the growth rate accelerates. Last quarter's earnings beat by 2.7%. but with analysts becoming slightly more bearish of the stock and strong economic headwinds brewing, this may be the end of Chipotle's run. Look for more analysts to cut earnings leading up to the next earnings report in a few months as a key indicator of a top in this stock.