Is the Growth Trade Dead? Maybe.
That’s the most succinct short answer I can give. The real world is too dynamic and complex to answer with complete certainty in either direction. What does seem to be going on is a shift in growth companies catching the market’s eye.
That requires a bit of a longer explanation…
Investors have been following growth stocks for huge profits.
In the past few years, the so-called FANG stocks have provided the lion’s share of the stock market’s return. But back out Facebook (FB), Apple (AAPL), Netflix (NFLX) and Google (GOOG), and the stock market’s annual double-digit returns of the past few years would fall substantially.
That trend may be shifting. In the past two weeks, Facebook and Netflix dropped substantially after each company reported earnings. Netflix is down 15 percent. Facebook slid nearly 20 percent after the market closed Wednesday.
These mega-sized companies saw their value shrink by billions in the matter of seconds. Netflix saw a $15 billion decline. As for Facebook? A whopping $120 billion gone in the blink of an eye. Most companies in the S&P 500 Index never even get to a valuation of the $120 billion that Facebook lost. Founder and CEO Mark Zuckerberg lost over $17 billion alone on Thursday – some perspective on having a bad day if there ever was!
Both companies fell for similar reasons. They reported slower-than-expected growth. Netflix, which measures growth by subscribers, saw a flatline. Facebook, which measures the number of users it had, reported its slowed growth ever (but still growth).
In terms of actual earnings, which allows for the best apples-to-apples comparison of any company in any industry, both are still laughably expensive. Facebook seems reasonable at 30 times earnings, but Netflix trades at 240 times earnings. And with a balance sheet cash-poor and debt rich, Netflix might as well retool their show House of Cards to be about their financials. Facebook is far better on the debt front, but without user growth, they’ll have to work in different ways to increase revenue going forward.
With some of the mega-popular tech names on the decline, however, it’s not all bad news. Smaller—but still massive—technology companies have been faring well this earnings season. Advanced Micro Devices (AMD), handily beat earnings and saw shares rise. This chipmaker has been faring well and putting up some impressive growth numbers.
Even better, there’s more room to run. Mega-cap companies could have trouble doubling from here. With a share price in the teens, a company like Advanced Micro Devices could double without creating a valuation concern that lies with other companies.
They’re not the only company faring well right now. Graphics processing company Nvidia (NVDA) has been on a tear the past few years. While their products have historically been used for computer gaming, graphics processors beat traditional computer chips out of the water for efficient processing needs. From cryptocurrency mining to the latest in self-driving car technology that needs to adapt in real time to changes, graphics processors are becoming a more useful tool for solving today’s problems.
So I don’t see the growth trade as dead. But I do see it shifting to smaller players that can continue to grow fast using traditional metrics. Focusing on number of users or subscribers, as Netflix and Facebook do, is a recipe for trouble when those numbers slow down.
If Mr. Market has had anything to say about these companies lately, it’s that earnings do matter, even if you try to hide them in non-traditional metrics.
Much like the technology rally of the 1990s that eventually became a bubble, some companies will lead for a time. Then others will take the mantle as growth slows in the first group. Sometimes those companies can recover.
Indeed, it’s hard to see traditional media companies moving with the speed and agility in the market the way Netflix has. Or another social media company as adept as Facebook managing to become as profitable. At least, for the immediate future. So, while the growth may be slowing, it isn’t gone yet.
And even while this plays out, there are plenty of other parts of the market as well. Value companies tend to be seen as the opposite of growth ones. And it’s a strategy that has been out of style while the market was soaring up—growth companies were simply capturing too much of the gains. But value never goes entirely out of style, and can provide investors with far more income than fast growth plays.
So, no the growth trade isn’t dead. But it is shifting. And finding out-of-favor names may provide better returns with income as well. That sounds like a better strategy, especially as stalled growth trades will mean sideways-trading markets for the foreseeable future.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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