Last Updated on March 26, 2021 by Henry John
The past couple of weeks, for growth investors, has been like watching Diamonds becoming Quartz: High-flying stocks becoming fast-sinking stocks. Week after week hope of a turnaround becomes dimmer and dimmer as performance gets from bad to worse.
Tesla (TSLA) and Zoom (ZM), two of the wildly successful stocks of 2020, are down over 12% YTD. And Over the past month, the Nasdaq Composite is down 1.33%, however, in the same time frame, the Dow Jones Industrial Average is up 6% and the S&P 500 is up 3.09%.
The number for the Dow and the S&P 500 is even more impressive on a YTD basis with the Dow up 8.45% and the S&P 500 up 6.18%. However, the performance of the S&P 500 Value and Growth Index tells an unusual tale: The S&P 500 Value is up 9.21% YTD outperforming the S&P 500 Growth that is down 0.44% YTD.
Clearly, the broader market is healthy, and value stocks are thriving amidst the sinking of growth stocks. And these make the bearish performance of growth names a more bitter pill for growth investors to swallow.
The performance of renewable energy stocks, in many ways, embodies the story of growth stocks so far. With Biden in the White House, this was supposed to be a year for Clean Energy Stocks, and it was looking so back in January until the chip shortage became a crisis and the fear of inflation heightened as the Treasury yield kept rising at a pace faster than Usain Bolt on the track.
At the moment, 2021 doesn’t feel like another year that growth names will reign supreme. And this is causing many growth investors to execute a lot of panic buys and sells, and there lies the problem: Panic buying and selling.
“You need to know the market’s going to go down sometimes. If you’re not ready for that, you shouldn’t own stocks. And it’s good when it happens.” Peter Lynch
Millions of inexperienced investors miss this part of investing 101: you need to know the market’s going to go down sometimes. And as a result, the failure to get themselves and their portfolio ready for a bear market is costing them lots of $$$.
Around the second week of January, I started selling stocks in my portfolio that are relatively overpriced even though they were performing really well at the time. And the reasoning behind the move was to free up enough cash in the advent of a bear market.
And with enough cash at my disposal, I can start moving from defense to offense, as Peter Lynch said about a bear market, “it’s good when it happens”.
If you’re a growth investor, here are two moves I expect smart growth investors to be doing amidst the current growth downturn:
1. Hedge your Portfolio with investment in Cyclical Recovery Stocks
The rotation into cyclicals is evidently not over, and if you’ve not rotated into cyclicals, now is still a good time to buy cyclicals. Recent economic data shows that we are heading deeper into recovery mode, with strong employment and retail sales numbers rolling in.
Three months into vaccination, the rate of vaccination is rising and the rate of death from Covid-19 is dropping significantly. It is looking more likely that the worst days of the pandemic are behind us and investors are echoing this sentiment with their rewarding of cyclicals as they get ready for a return to normality (whatever normality may turn out to become).
Cyclical stocks are stocks of companies whose performance is tied, to a great extent, to the overall economic performance. They tend to perform well during a strong economy and poorly during a weak economy, closely following the cycle of expansion, peak, recession, and recovery. When the economy shutdowns, cyclical stocks crash down, and when the economy recovers, they tend to recover.
Airline, hotel, restaurants, and manufacturing stocks are typical examples of cyclical stocks. And you can mitigate the downturn of your growth names by buying fundamentally strong cyclical stocks.
2. Double down on Growth Stocks
The current negative sentiment around growth stocks will not last forever, at some point, the drop will hit the bottom and start reversing northwards. This strong possibility presents an opportunity for investors to double down on their favorite growth stocks at a discount.
However, not all growth stocks are the same. In times like this, wise growth investors should be looking to double down on growth stocks with really strong fundamentals and reasonable valuation.
Growth stocks that are still valued at crazy multiples of sales or earnings should be avoided. It’s evident that these kinds of growth stocks suffered the most this year and will most likely suffer significantly more under a prolonged negative economic and market atmosphere for growth names.
Over the past 10 years, the S&P 500 Growth produced a 16.02% annualized return and the S&P 500 Value produced an 11.14% annualized return.
Long-term, growth will outperform value, good growth stocks at lows will outperform value stocks trading at highs over the long-term. As such, it’s only common investing sense to double down on good growth stocks at their lows.