A Hot Sector of the Market I Feel Will Soon Be a Buy Again

Everything in the stock market experiences its own cycle of enthusiasm among investors. And this is especially well illustrated among speculative issues.

There was a time only a few years ago when some of the hottest speculative stocks were in solar energy. Now this small equity universe is still trying to rebuild itself.

And in more recent history, 3D-printing companies experienced incredible capital gains, only to experience incredible capital losses in what is a commonality among the market’s most speculative stocks.

At the end of the day, high-flying positions are still real businesses that have to deal with managing their own business conditions and hype among institutional investors.

As an investor, you have to consider both realities—the growth an underlying business is experiencing and the enthusiasm the marketplace has for such an enterprise or sector.

Twelve months ago, 3D Systems Corporation (DDD) was trading at $44.00 a share. Then it appreciated to a high of $97.28, before spending most of this year retreating to the $50.00-per-share level.

It’s only recently that the position broke the $55.00-per-share barrier, still sporting a forward price-to-earnings ratio of approximately 46.

Fervor for speculative stocks definitely diminished at the beginning of this year, and it’s part of the cycle that equities perpetually experience.

At the beginning of 2013, the breakout was in large-cap blue chips. Institutional investors had just started buying these stocks, and they led the broader market higher.

Then the NASDAQ Composite began to improve and actually took the lead for a while. But even with the Federal Reserve onside, it didn’t take too long for big investors to just book some profits. And they did so in the most speculative names, which included biotechnology stocks and initial public offerings (IPOs). (See “Biotechs Still a Trader’s Paradise?”)

The explosion experienced in 3D-printing stocks is both a reflection of genuine business growth and bandwagon fervor among momentum traders.

Stratasys Ltd. (SSYS) is worth about the same as 3D Systems currently. The company should produce about 40% in sales growth this year and 25% in 2015, according to current estimates.

It won’t be too long before Stratasys crosses the billion-dollar mark in annual sales.

But while these are growth companies, stocks like this typically are boom-and-bust, just like so many technology stocks were in the late 1990s.

The stock market is currently trading off of geopolitical events and global economic news, which it tends to do during the lull between earnings seasons.

Because the broader market is right at its high, I would generally not be buying stocks currently. And this is especially the case regarding the market’s most speculative issues.

But this doesn’t mean that 3D-printing stocks won’t move again. All that’s required is relative outperformance, which is to say that if a company is able to beat Wall Street financial estimates, these stocks could be on fire again.

I wouldn’t buy before second-quarter earnings season, but after the numbers, this market is likely going to keep ticking higher.