What inflation? Small investors keep piling on attractive growth stocks

Individual investors continue to panic in stocks of growth companies, the types of buzzy stocks that have posted explosive price gains this year. Advanced Micro Devices Inc., Nvidia Corp. and Apple Inc. are the three stocks most bought by individual investors this month, according to WandaTrack, a Wanda Research flow tracker that measures net purchases.

Growth stocks are typically companies—often tech firms—that are expected to generate above-average profit growth in the future. They thrive in a low rate environment over the past year and a half. Investors are usually willing to pay a higher price for such companies when they do not see many options for big profits.

For example, the 18 stocks that are best-loved by individual investors, including chip makers AMD and Nvidia, trade on average at nearly 13 times their previous 12-month sales, according to an analysis of Dow Jones Markets data. Huh. Shares in the S&P 500 have an average turnover of three times their sales.

But rising inflation could be a problem for growth stocks. That’s because inflation brings the prospect of higher interest rates and higher bond yields, making the cash flows of future growth stocks less attractive. In turn, traders typically reshuffle their portfolios to include other investments that stand to benefit from rising rates.

A government report this month showed that the consumer-price index jumped 6.2% in October from a year earlier, climbing at the fastest pace in three decades. Fund-flow tracker EPFR, whose data mostly captures institutional investor behavior, estimates investors reacted by pulling in more than $2 billion from US tech-focused mutual and exchange-traded funds in the two weeks ended November 17. Gave. This is the epitome of the worst vibe. Since the end of the two-week period in early January 2019.

At the same time, institutional investors are pouring money into more value-oriented sectors, such as consumer goods, healthcare and utilities, EPFR data shows. Those industries trade at lower valuations and tend to be more defensive for investors in times of uncertainty.

Greg Hahn, chief investment officer at Indianapolis-based Winthrop Capital Management, said his team is hedging the risk of large-cap technology stocks.

“We are running out of development,” said Mr. Hahn. Instead, the firm is focusing on finding quality companies that have fair valuations and strong balance sheets—that are “potentially sustainable into the next market cycle,” he said.

More recently, Mr Hahn said, he has linked up with a company that makes engines and generators, and a pharmaceutical company that produces medicines and other products for animals.

To be sure, US stocks are still hovering near records, bond yields are at historically low and gold prices have eased their earlier rally. This shows that fear of inflation has yet to prompt many professional investors to fully enhance their playbook. According to Bank of America Global Research, 61 percent of fund managers surveyed this month believe inflation is temporary.

Still, the recent divergence in strategy between professional and individual investors is the latest example of unusual dynamics in the financial markets this year. Time and again, smaller investors have bought GameStop Corp. and Hertz Global Holdings Inc. As such by sending stocks bullish, with little regard for the underlying value of the companies, long-standing trading strategies have been carried forward. Some rely on the classic momentum investing – asset buying strategy simply because they are growing.

It is not uncommon for stocks preferred by individual investors to fluctuate. But those stocks can pay off, too: AMD and Nvidia are each up 28% or more month-to-date, while Apple has climbed 8.1%. This compares with a 2.1% increase for the S&P 500.

“The lessons we have learned in the last 12 to 18 months… are IPOs, fiscal stimulus and other micro [events] Retail investors are a much bigger driver of behavior” than inflation readings, said Viraj Patel, global macro strategist at Wanda Research. “We’ve never been up the day since the CPI and saw heavy selling from retail investors.”

Matt Delao, a 28-year-old individual investor from California, said he has followed data on inflation and supply-chain disturbances this year. But he said his trading strategy has mostly focused on screening stocks that appear to be on price for a significant move. Most recently, he has traded options for AMD and bitcoin-mining company Riot Blockchain Inc.

Mr. Delao plans to remain in growth stocks for now.

“There’s a lot of momentum investment in that,” he said. And as long as prices are rising, there’s no reason to bail.

This story has been published without modification in text from a wire agency feed