I have never been a fan of momentum stocks. Over the years, many hyped-up companies have gone public and have had a successful IPO. However, the underwriters and the insiders of such companies benefit the most from public offerings at the cost of regular investors.
Momentum stocks usually follow a trend from which investors can benefit. The companies have a successful IPO and see their shares rising to unrealistically lofty valuations. After the stock becomes overvalued, a large portion of insiders tend to dump the stock whereas the underwriter banks continue to increase the price target of the stock, luring more investors. Eventually, after the insiders and underwriters have cashed in a lot of their shares, the market realizes the overvaluation of the stock, and it finally crashes.
This is exactly what has happened to a lot of companies in the past, the latest one being GoPro (GPRO, Financial). Investors can benefit from this trend by shorting the company at the correct time. While GoPro has crashed considerablym and it is probably too late to short the stock, there are other such opportunities in the market. One such opportunity is Fitbit (FIT, Financial).
Fitbit went public earlier in 2015 and saw its shares rise from $30 to over $50. While the rally has proven to be short-lived, Fitbit has more downside to offer, which is why investors should consider shorting the stock. There are a few reasons why Fitbit is a short.
Overvalued and prone to competition
Despite the recent plunge, Fitbit is trading at trailing P/E of 67. No matter how you look at it, the stock’s valuation is stretched, and it is unlikely for Fitbit to grow into its current valuation. Thus, the stock will continue its downward trajectory, making it a good short candidate.
Moreover, the company, like GoPro, doesn’t have a moat and is highly prone to competition. The company is already competing against the likes of Apple (AAPL, Financial) and Xiaomi in the United States and China whereas in Europe, Fitbit faces stiff competition from award-winning wearable makers like Polar, Suunto, Garmin.
While the wearable market is growing, Fitbit isn’t positioned perfectly to benefit from it. The big-name competitors will probably disrupt Fitbit’s market share going forward, making the stock a short.
Conclusion
Being a momentum stock, Fitbit has a lot more downside to offer. The company is prone to competition from big-name companies, and it is only a matter of time before the company’s market share starts to shrink. Moreover, the company is trading at a lofty valuation, and it probably will not manage to grow into it. All things considered, investors should short Fitbit.