Someone once said if you make a forecast and it turns out to be right, don’t let anyone forget it. In the last couple of weeks Cornell Capital Group issued two warnings. In Beware the Bonds of October, posted on September 22 we warned that bonds appeared even more overpriced than stocks and that a rise in yields could have a sharply negative impact on stock prices. Next, in Bubble stocks: What goes up might come way down posted at the start of trading on October 3, we identified ten companies that we felt were significantly overvalued and could drop substantially. Well we did not expect to be right so fast! The table below shows the perform of the ten stocks we identified along with the ten-year Treasury bond.
The results are dramatic. The ten stocks are down an average of 17.9% and three are down more than 20% – in a week. Of course, we did not know this was going to happen or our short option positions would have been much larger. But for the reasons we stated, these ten companies were priced to a level of perfection that was hard to reconcile with a traditional measure of fundamental value. The gap is still there, but it is a good deal smaller now.