By Gunjan Banerji
Investors have given up bargain hunting so far this year.
Instead, they are piling into shares of some of the market's
biggest winners: so-called growth stocks, shares of companies that
promise rapidly increasing profits and revenue.
They remain as hungry as ever for shares of software providers
and cloud-computing companies, flocking to heavyweights like
Microsoft Corp., Apple Inc., Amazon.com Inc. and Google parent
Alphabet Inc. These stocks 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.
"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."
It is 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.
Since then, markets have been rattled by tensions between the
U.S. and Iran and the coronavirus outbreak in China, which has
sickened tens of thousands of people around the world and crimped
business activity. Oil prices tumbled into a bear market and
investors have flocked to traditionally safer bets like U.S.
Treasurys.
But through the turbulence, investors kept snapping up shares of
companies promising high growth, confident they 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 Federal Reserve'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 financials 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 punished shares of energy
companies. 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. Overall corporate earnings have been
roughly flat for the fourth quarter, but 84% of companies in the
tech sector have reported profits that beat expectations, according
to FactSet. Apple posted record revenue, while Microsoft's cloud
business continued to shine. Shares of both companies are near
highs.
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 like 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 like Tesla Inc. and Shopify Inc. as a sign of
over-exuberance 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 hypnotized 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 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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