Stock niches are constantly changing, and some are more prone to overheating than others. According to Brad, fads are like buses: “A new one comes along every few minutes.” Some trends to watch out for today include biotech, “healthy living” companies, social networks and fast casual dining.
Like the dot-coms before them, many biotech companies have seen their share prices soar, based more on promise than on actual profits. That’s not to say many companies won’t succeed. “Several companies have made critical breakthroughs in treating cancer and other serious diseases,” Brad notes. “But picking the long-term winners out of this packed field is more of a guessing game than a sure thing.”
Indoor cycling studios, “wearable” fitness trackers and gluten-free anything are hot right now. But the diet and fitness industry is notorious for its fads. Remember meal-replacement shakes and the South Beach craze? Yes, yoga has been around for thousands of years, and people who suffer from celiac disease will always have to avoid gluten. “Most trends, though, will not stand the test of time,” Brad warns.
Social networking has grown exponentially in the high-tech market, with new apps debuting almost every day to help people connect. But be wary of the plethora of recent spinoffs trying to compete with the core players, Brad says. Many new companies depend on advertising dollars for revenue, and the competition is fierce. “Advertisers are focusing more on tracking ad success on these networks, not just relying on user count.”
Offering a wider range of cuisines—and often higher-quality ingredients than traditional fast food restaurants—fast casual restaurant companies have seen rapid growth in recent years: a 550% increase in sales since 1999, according to Euromonitor, a research firm. Fast casual connoisseurs may be tempted to believe that their palates will decide who will come out ahead. “But you can’t just pick stocks with your taste buds,” Brad says. Restaurants, even big chains, face strong headwinds from diners who may be chasing a different food fad next year.
- Fast growth, but no earnings. A company may be popular, but not profitable.
- A spike in the stock price. If the stock already had a big run, check its current valuation against historic price-to-earnings ratios. If it’s trading well above historic ranges, a big selloff may be coming.
- Overemphasis on clever marketing. Some companies garner interest with a catchy jingle or lovable mascot. But a smart business plan is what’s important. Keep your eye on company fundamentals, Brad says.