Why Mess With a Winning Strategy? Investors Bet on Tech -- Update

Date : 02/18/2020 @ 1:44AM
Source : Dow Jones News
Stock : Shopify Inc (SHOP)
Quote : 504.52  11.29 (2.29%) @ 9:18PM

Why Mess With a Winning Strategy? Investors Bet on Tech -- Update

Shopify (TSX:SHOP)
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2 Months : From Feb 2020 to Apr 2020

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By Gunjan Banerji 

The revenue warning issued on Monday by Apple Inc. is another test of investors' long-running love affair with so-called growth stocks.

For weeks, investors have bet that the giant technology stocks that have led the market would march on despite the disruption and economic slowdown in China caused by the coronavirus. They've continued to put their faith in companies that promise rapidly increasing profits and revenue.

"Investors believe they're better positioned to weather any economic storm," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co., speaking of growth stocks. "Even if there's a recession, people will keep using Facebook."

Investors could take Apple's warning on Monday that it won't meet revenue expectations for the current quarter as a sign that the growth stock run is over. Or they could see the downturn as temporary and specific to Apple.

Apple was the most vulnerable of the popular tech giants, which include Microsoft Corp., Amazon.com Inc. and Google parent Alphabet Inc., because these companies are software and cloud-computer providers. Apple depends on a sophisticated supply chain that runs through Chinese factories to produce its physical products, including the iPhone.

Either way, growth stocks like Apple are vulnerable to a downturn. The big names are sitting on double-digit gains in 2020 and have powered 45% of the S&P 500's total return, which reflects price changes and dividend payments, according to S&P Dow Jones Indices.

The index has set 12 record closes this year as it has risen 4.6%, or 4.9% when including dividends.

The growth rally has been a shift from the fall when value stocks -- those that tend to trade at low prices relative to their earnings or net assets -- outperformed growth shares and pundits predicted their long-awaited rebound had arrived after years of disappointing returns. Those hopes were buoyed by three interest-rate cuts by the Federal Reserve that were expected to spur a rally in bank stocks and other traditional value plays.

Even through periods of turmoil, investors have stuck with growth stocks. Markets have been rattled even before the coronavirus outbreak, which has sickened tens of thousands of people around the world and crimped business activity. The slowdown pushed oil prices into a bear market and drove investors to traditionally safer bets like U.S. Treasurys. Before that, there were tensions between the U.S. and Iran.

Investors appear confident growth stocks can survive these challenges. Many are eager to hold on to stocks they view as enduring winners of a period of technology disruption. And despite their dramatic rally, valuations among tech giants aren't approaching the levels seen during the dot-com bubble.

As they grapple with a murky outlook, investors will turn their attention this week to the Fed's latest meeting minutes and fresh reads on manufacturing. Meanwhile, results from Walmart Inc. on Tuesday will offer new insight into the health of the consumer.

The run in value stocks "was short lived," said Joe Fath, portfolio manager for U.S. growth stock strategy at T. Rowe Price. "There's a number of crosscurrents that are driving what you've seen."

The MSCI USA Growth index has returned 9% this year, while the MSCI USA Value Index added 1% through Thursday.

The divergence between growth and value shares has been wide since the financial crisis. Over the long run, however, value stocks have earned better returns than their growth peers, and some investors say it is only a matter of time before growth stocks' reign ends.

The recent shift has given extra fuel to the market's star performers and punished shares of financial and energy companies, which typically are in the value category. Financial stocks have struggled to keep pace with the broader market this year, rising just 0.9% in the S&P 500, as yields have dropped in the wake of the viral outbreak. Higher yields tend to improve banks' lending profitability.

Meanwhile, the slide in oil prices has hit energy shares. The S&P 500's energy sector has declined 10.2% this year, the biggest drop among the 11 groups in the index.

As these sectors have muddled through, big tech companies, which have become nearly synonymous with growth in recent years, have continued to stand out. The S&P 500's tech sector is up 11% this year, leading the way as it has for much of the decadelong bull run. The enthusiasm has even extended to initial public offerings including Uber Technologies Inc. and Pinterest Inc. that made a big splash last year. Though they initially floundered, the stocks have raced past the broader market, rising 33% and 25%, respectively, in 2020.

"The market is going to continue to reward these companies," said Daniel Morgan, senior portfolio manager at Synovus Trust Co. "There's still a large appetite for growth."

Mr. Morgan said he recently bought more shares of Amazon ahead of the company's latest earnings report. The e-commerce giant's stock is up 15.5% this year, also to near record levels.

Investors say the recent tech run is different from the dot-com bubble and rooted in corporate fundamentals. However, some point to rallies in stocks such as Tesla Inc. and Shopify Inc. as a sign of overexuberance in the market. Tesla's rally has added $69 billion to its market value this year, while Shopify has gained $16 billion. Neither has ever posted an annual profit.

"It's fear of missing out," said Bill Smead, chief investment officer of Smead Capital Management, who added he remains optimistic about value stocks and recently invested in the energy sector.

Investors who missed out on other big tech companies' gains in recent years may be hunting for the next favored stock, analysts said. And as these shares go up and up, they attract investors who buy stocks simply because they are rising, helping magnify their gains.

Some still say growth stocks won't keep investors captivated for long. Many are expecting the Fed's interest-rate cuts to ripple through the economy, potentially reinvigorating shares of financial companies and other beaten-down shares.

Mr. Schutte, of Northwestern Mutual Wealth Management, said that if someone gave him $1 to buy FANG stocks -- the popular acronym for Facebook, Amazon, Netflix and Google -- or to invest in everything else, he would "take everything else."

"I think the rally will broaden and things that haven't been rising as much will rise more in the future," he said.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

 

(END) Dow Jones Newswires

February 17, 2020 20:29 ET (01:29 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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