This past week or so has been a “holy crap” one for those who are overexposed to momentum stocks — you know the ones, they’re the stocks I keep buying in small chunks but that are very expensive and a little frightening, the ones in my portfolio that I put in that category would be Five Below (FIVE), Okta (OKTA), Square (SQ), Teladoc (TDOC) and Shopify (SHOP)… and I should throw in Ligand (LGND) as well, though I haven’t added to that position in years. Small growth stocks whose valuations cannot be justified based on the present, so you have to “believe” in the future story to take them seriously.
And I do generally believe, of course, or I wouldn’t own those stocks — but this is what that group has done since I last updated my portfolio for you:
FIVE data by YCharts
That happy little pink line at the top, down only 1%, is the S&P 500 — so it wasn’t a great week for the market, but it was an abysmal one for momentum growth stocks. The big ones didn’t fare much better, NVIDIA (NVDA) and Netflix (NFLX) and their ilk were also down similarly.
So why’s this happening? What to do?
I think we’re seeing a combination of rising fear among big investors, who keep thinking about that next crash, and, probably more importantly, those rising interest rates that make the future less valuable than the present. Most investors will look at the future potential they see, discount it by the cost of sitting in something that we traditionally think of as “risk-free” (like the 10-year treasury note), and see whether the risk adjusted return is good enough to justify investment.
When you make those kinds of calculations in a low-rate environment, growth stocks look more attractive because the comparison is weak… the “no risk” investment doesn’t return anything, so you don’t have to “discount” those future possible returns as much, and you’re not giving up much by speculating on the future. As rates rise, those spreadsheets see a cascading impact of higher “risk-free” returns, and that impacts the current valuation. Since spreadsheet models drive so much of what analysts expect and form the basis of how many institutional investors justify decisions to their clients and customers, it impacts everything.
And yes, the big change to the “fundamentals” last week was that interest ...