These Stocks Have Soared for a Reason. Investors Are ‘Rationally Exuberant.’ 

Strategists at Evercore took a look at the situation in a recent research note. They flagged a variety of cases in which investors are “rationally exuberant” about stocks—a reference to a 1996 comment about “irrational exuberance” in financial markets by Alan Greenspan, chairman of the Federal Reserve at the time—saying the ideal playbook may be different for various types of investors.

On the list of stocks rallying for good reasons is

Nvidia

(ticker: NVDA), which has nearly tripled this year. Its recent run looks a lot like what happened in the tech rally that ultimately lead to the bursting of the internet bubble in the early 2000s. But the main stock-price driver has been surging earnings-per-share estimates from analysts, rather than sheer hope or speculation about its earnings potential.

The advent of artificial intelligence means that the market for chips, especially those meant for data centers, is expanding. Now, the stock’s valuation—the multiple of the annual per-share earnings expected in the near term—is up to 49 times, higher than the

S&P 500
’s
roughly 19 times. That makes sense, though, because analysts expect Nvidia’s EPS to increase about five times as fast as aggregate earnings for companies in the S&P 500.  

Meta Platforms

(META) is another, with a gain of more than twofold this year. The main driver has been surging profit forecasts. Consumer spending and corporate outlays on marketing should rebound after a slide last year, the thinking goes, while a weakening U.S. dollar means that sales made overseas will translate into more dollars. Plus, Wall Street has realized that the company still has some decent profit growth ahead of it, especially as AI makes advertising on sites such as Facebook more appealing.

Before the latest surge, the stock was out of favor, trading at a lower valuation than the overall market. It now sells for 21 times the per-share earnings expected for the coming 12 months, still not wildly above the S&P 500’s multiple. 

Tesla

(TSLA) and Amazon.com (AMZN) are up more than twofold and more than 50%, respectively, this year. Expectations for profits haven’t changed much, but the companies’ valuations have risen for sensible reasons. The Federal Reserve has nearly finished raising interest rates, and the yield on 10-year Treasury debt has dropped by about a tenth of a percentage point this year.

Lower interest rates reduce the current, discounted value of earnings that are expected to arrive in the future, which is specially beneficial for high-growth companies. Investors see reason to hope yields could keep declining for some time. 

Chipotle Mexican Grill

(CMG) is up more than 50% this year as the stock benefits both from higher expectations for earnings and mounting confidence about the fast-food chain’s prospects for longer-term growth. Chipotle reported strong results for its latest quarter, prompting analysts to raise their forecasts for profits. Higher prices and store openings boosted sales, while costs such as the price of avocados declined.

That favorable picture, plus the decline in bond yields that has benefited other growth stocks, has lifted the valuation. 

For the long term, all those stocks could be decent bets, as could Advanced Micro Devices (AMD),

Netflix

(NFLX),

Salesforce

(CRM) and

Carnival
Corp
(CCL), other names on Evercore’s list. They aren’t likely to post the types of gains recently seen, but earnings growth could still take them higher over the coming years as consumer spending remains resilient and trends in technology continue to play out.

All of these stocks have already taken breathers and are down from or trading near their peaks, so long-term investors may want to wait for additional weakness before acquiring shares.  

That is where Evercore sees an opportunity for short-term traders. Those people should prepare for the increasing likelihood of losses in the near term by selling call options and buying puts, the firm argues. Calls expose investors to potential upside, while puts enable investors to hedge their positive bets on a stock, in case the shares fall.

Options for the stocks on the Evercore list have made similar moves. The price of puts has come down because of the prevailing view that the share prices will keep rising, reducing the need for protection against losses, while the cost of calls has been more or less stable.

The result is that the price spreads between puts and calls are at some of the narrowest levels seen in the past year. That means puts look fairly cheap, while calls are a little expensive.

Those are the options. Which one is right depends on the investor.

Write to Jacob Sonenshine at [email protected]