May 2021 - Is The Coast Clear For Growth Stocks?

Last week we speculated that after several months of consolidation and correction, growth stocks may well have been closer to a bottom than a top. A number of developments this week may give credence to this idea. Have these stocks found a near term bottom? Is the coast clear for investors?

Remember that investor enthusiasm waned for these growth stocks as the perception of rising interest rates and inflation fears compressed multiples, leading investors to rotate out of growth and into value, or more to the point, into those equities poised to benefit from the re-opening of the economy trade.

Perhaps the group that suffered the most from this change in investor sentiment was the software cloud infrastructure group that proved absolutely essential to allowing the work-from-home phenomenon during the pandemic. And the “poster child for this change” may well be a software called Snowflake. At its peak, the company was valued at over 100 times sales!! After a dramatic sell off, the stock may have found a near term bottom last week at a mere 50 times sales, when a number brokerage upgrades catalyzed a bounce of about 25%. All the while, the fundaments of the firm continue to be excellent. Other leading infrastructure cloud stocks have recently followed suite this week enjoying Wall Street upgrades as well, including Salesforce.com and Splunk. Again, fundamentals and secular tailwinds remain strong. This is all about valuation and psychology.

Two other market related factors may impact the perception of growth stocks as well. Emerging biotech stocks are driven by data readouts and potential approvals. Some time in the next few weeks, we anticipate that Biogen will hear from the FDA on whether their controversial Alzheimer’s drug will be approved (controversial because data mining in their trial was necessary to find statistically significant efficacy). The company expects approval, but most impartial observers call it a coin flip. Nonetheless, a positive decision for the company would likely spark broader investor enthusiasm for the group.

Finally, the semiconductor industry has suffered from severe shortages this year limiting upside potential across a number of industries. These shortages are expected to moderate throughout the remainder of this year potentially setting up 2022 as a year of outperformance- at least initially.

So, is the coast clear for growth investors? Should we buy the dip? It certainly feels like it’s worth a flier……

Bruce