20 Stocks That Look Like They’re in Bubble Territory Right Now

To help identify the bubble stocks most likely to crash, I turned to a study that appears this month in The Review of Financial Studies. Entitled “The Dynamics of Disagreement,” the study was conducted by three finance professors: Kent Daniel of Columbia Business School, Alexander Klos of Germany’s Kiel University, and Simon Rottke of the University of Amsterdam. (Daniel used to be Goldman Sachs’ co-chief investment officer.)

The researchers’ core insight is that stocks that are difficult to sell short are likely to be overvalued, Daniel said in an interview. That’s because short sellers play an essential role in providing a reality check on the optimists who are predisposed to always view the glass as half full rather than half empty.

This doesn’t mean that the short sellers are always right, needless to say. But then again, the optimists aren’t always right either. It’s in the give and take between the longs and the shorts that the market generally does a good job of setting a stock’s price. (Short sellers borrow shares they deem overpriced and sell them, hoping to repurchase them at a later date, return them to the lender, and pocket the difference.)

When you take away the counterbalancing pressure that the short sellers provide, stocks can become like Icarus—soaring so high that the sun melts their wings of wax. To show this, the researchers created a database of highflying stocks that also were difficult to short, as measured by a dearth of shares in the share-lending market. They found that, between 1980 and mid-2020, these stocks lagged the market for five straight years after making it into their database, lagging the market over those five years by 13% a year, on average.

Prof. Daniel shared his methodology with Barron’s in August 2021, which I used to produce a list of 131 bubble candidates. Since then, through June 12, the 25 stocks in that list with the largest market caps—which is the list that appeared in the column—have lost an average of 16.6%, versus a 1.2% loss for the
S&P 500 index.
The 25 stocks on that list with the greatest trailing 12-month return on the date that column appeared (a list that didn’t get published), lost even more—an average of minus 66.1%.

I subsequently applied the researchers’ methodology on two more occasions. One was in June 2022, one year ago, and since then the 25 stocks listed in that MarketWatch column have lost an average of 27.2%, versus a 13.9% gain for the S&P 500. Another occasion was this past December; since then the 20 stocks listed in that Barron’s column have lost 1.4%, in contrast to a 14.5% gain for the S&P 500.

In light of this new study, and given the success (or should I say “failure”) of the stocks the study’s methodology produced over the last two years, I hereby present a fresh list of bubble candidates. Of the 59 stocks that the methodology identified, the 20 with the largest market caps appear below.

Mark Hulbert is a regular contributor to Barron’s. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].

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