We all love stories.
As a child, I loved The Berenstain Bears. As an adolescent, I was into Goosebumps. As a grown-up, I spend most of my days reading about the stock market. They’re fictional for the most part, and right now, they’re a lot of fun. Turning points are like the Choose Your Own Adventure Books.
After years and years of growth outperforming value, the pendulum is finally swinging the other way.
Buying cheap stocks is great in theory, but holding cheap stocks as they get cheaper is excruciating. 2020 was the worst year ever for value, capping off a challenging decade. This pushed the valuation spread between growth and value stocks to their widest level ever.
Everyone knew that cheap stocks were statistically cheaper than they’ve ever been. I mean, how many “Is Value Dead?” articles were there last year? The consensus view just a few months ago was:
“Cheap stocks are cheap for a reason. What would you rather own right here, financials or tech stocks?”
We all saw the same thing. However, nobody could identify a compelling catalyst that might make things go the other way. It’s always hard to picture the future looking different than the recent past.
But now that value is destroying tech, catalysts are coming out of our ears. It’s all anybody can talk about. It’s awesome to watch how price changes the narrative. And to be clear, I don’t mean this like, “haha, you idiots are making up stories. Price is the only story that matters.” I need a good story as much as the next person.
People have pointed to the rise in interest rates as the pin that pricked the bubble in expensive growth stocks. What if this is only part of the story? The market may be pricing in a boom, and paradoxically, growth will take down growth stocks.
Joe Weisenthal wrote a post today where he said, and I’m paraphrasing, that the reason tech stocks have done so well in the past decade is that growth was hard to come by. So no price was too high for companies that were growing at 20%. But if we’re about to enter a spending boom and a GDP boom, then why pay 100x sales for Zoom when you can pay under 2x sales for Delta?
Yesterday I threw out the following question on Twitter. I shouldn’t have used Zoom because I really meant growth stocks, but here was my question.
What's more likely in 5 years?
"I can't believe Zoom was once a $100 billion company"
"I can't believe I got to buy Zoom 45% off its highs because we were scared of higher rates"
Using Zoom here as a catchall
— Michael Batnick (@michaelbatnick) March 8, 2021
I will go on record that I feel fairly strongly that it’s the latter. Let’s call it 70% confidence (I feel strongly enough that I’ve been building positions in some of these blown-up names over the last few days). But 30% of me can see us looking back and saying, “what the f*ck were we thinking?” $50 billion for Peloton? $160 billion for Zoom? $70 billion for Spotify?
Maybe growth stocks are selling off because the market is anticipating higher rates and a booming economy. Or maybe we just woke up one day and decided we’d gone too far.
The truth is that investors don’t need a catalyst to change how they feel. A change in narrative is the most powerful catalyst of them all.
Here’s my take on growth stocks. The businesses that continue to beat expectations will do phenomenally well. Those that fall short will get killed. I know that’s not very insightful, but it’s easy to lose sight of the fact that these flashing numbers on the screen actually represent an ownership stake in the company. I expect that the winners here, like Shopify and Square, will continue to grow over the coming years. If I’m wrong and this is the end of the growth story, then I will lose money, and life will go on.
Josh and I spoke about this and much more in the latest episode of What Are Your Thoughts?
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