That was the message from investors this week, who, after months of chasing value stocks, rushed back into the stocks of faster-growing companies with little profit. While major benchmarks rose, a Goldman Sachs index of unprofitable technology companies rose 18% over the five sessions. That compares to a 6.2% gain for the S&P 500 and 8.4% for the Nasdaq 100.
“A straightforward dash for waste” is how Bespoke Investment Group described it when explaining why smaller companies with the lowest returns on assets and no dividends were among this week’s biggest winners.Bloomberg
Asana Inc., an unprofitable software maker, was one of this week’s winners. Shares of the San Francisco-based company rose 27%. The maker of electric pickups Lordstown Motors Corp. gained 30%, while RealReal Inc., which operates a marketplace for luxury goods, was up 31%.
Lower-earning growth stocks have been hit hardest this year by concerns about slowing economic expansion and rising interest rates. Higher financing costs make financing more expensive and the value of profits expected to be delivered well into the future less attractive. Asana is down nearly 70% from a November peak, while Lordstown is down 19% since early January.By contrast, value stocks with better profitability and stronger balance sheets, such as HP Inc., outperformed. The Russell 1000 Value Index is down less than 2% this year, compared to an 11% drop for its growth counterpart.
The rally in growth stocks has been helped by perceptions that the Federal Reserve, which raised interest rates for the first time on Wednesday, will succeed in curbing inflation, according to Kim Forrest, founder and chief investment officer at Bokeh Capital Partners.
“If you think these companies will now have longer runways and not have to fight inflation, they have a chance,” she said in an interview. “Everyone likes a good sale.”
Big moves in the shares of smaller companies, like this week’s, often happen after market lows, Bespoke said in a research note Thursday. This week’s rally, however, appears to be driven more by mean-reversion and short-covering than anything else, the analysts said, suggesting the gains may not last long.
That conclusion appeared to be supported by data from Bank of America showing that for the first time in seven years, fund managers are now favoring so-called higher-quality stocks over lower-quality stocks.
“We view a quality shift as beneficial amid peak liquidity, declining earnings growth and increasing volatility, all backgrounds in which quality typically outperforms,” Savita Subramanian, head of US equity and quantitative strategy at Bank of America Securities, wrote in a research paper. Friday.
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