Vince Stefano, Portfolio Manager
WWM FinancialDuring the past 6-9 months ending in February of this year, the vast number of technology, retail and healthcare stocks in our New Innovations Portfolio, especially biotechnology, surged to all-time highs. Momentum built among high frequency traders as they continued their buying spree, regardless of market or stock price levels. Even the multi-billion dollar macro hedge funds increased their overall net exposure to offset the sharp losses in their short portfolios. Stocks of all kinds went straight up.
Unfortunately, we all know that surging markets reverse. Weak stock fundamentals are not the only reasons that contribute to a sharp decline. Headline news such as a slowdown in China, Russia’s annexation of the Crimea, the Federal Reserve continuing its taper program, and a number of Wall Street technicians calling for a market correction, all had a negative impact on investor psychology. Greed was replaced by fear.
Both the Dow Jones Industrial Average and the S&P 500 Index have a few mega-cap companies that can mask a sharp deterioration in the overall breadth of the market. Since the February high, biotechnology stocks, technology stocks (especially cloud related), and retail stocks have all sold off dramatically. As a result of the recent decline, many small to mid capitalization growth stocks have reversed much or all of their mid-February gains and are approaching bear-market levels. To some investors these stocks have lost their luster. To others, a resetting of these stocks at a lower and more attractive valuation is a positive as it creates a possible buying opportunity.
The big question is what to do. There is an old Adage: “The market can tell you when to get out, but not back in.” If you listen to the talking heads on TV and radio financial programs, they rant continuously about the negatives. Listening to this, the average investor wants to sell everything and put the money under his or her mattress. However, do you exit Nordstrom’s when merchandise is marked down 40% or more? Do you put your home up for sale when prices drop 20%? Most likely not. In fact, you’re probably more inclined to buy!
The same holds for stocks. Opportunity exists at market extremes. The recent sell-off in high-quality growth stocks has not changed their fundamentals, only their price. Many of these companies continue to grow top-line revenue by selling a unique product or service to an expanding marketplace. Disruptive technology is forcing companies to rethink their overall business plan and search out new innovations to increase competitiveness and profitability. Simultaneously, investors seeking to benefit from current inefficiencies should once again focus on high-quality rapidly growing companies with attractive fundamentals, improving balance sheets and
the ability to capture a large portion of their addressable market.