Growth Stocks Come into Question as Retail Investors Get Hosed

(Photo by PiggyBank on Unsplash)

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Pandemic-era fear-of-missing-out is turning into endemic-era regret-for-getting-in.

Retail investors have seen their portfolios plummet a staggering 44% so far this year, according to JPMorgan data. The frightful figures — which dramatically underperform any relevant index — come as new research calls into question the “growth” vs. “value” construct Wall Street loves to trot out.

Growing Pains

Flashback 18 months and even the most conservative Robinhood addict was projecting that digital-first companies would be reshaping the world order. By meme-stock logic, Zoom would’ve by now replaced email and Peloton would’ve reduced 24 Hour Fitness into a 12-hour operation. But a myriad of forces — namely: the importance of the office water cooler, rampant inflation, and the ensuing rate hikes — have knocked the tech comet from its extinction-level trajectory. Without access to cheap capital and (all too often) without a credible plan to actually turn a profit, so-called growth stocks are by and large, adrift.

Last week marked retail investors’ longest weekly selling streak since 2016, according to JPMorgan, as amateur speculators move to protect themselves by rotating into ETFs which track indices. For a group that was over-indexed to frothy growth stocks going into 2022, individual investors might consider heeding well-worn financial advice:

  • In a review of all US stocks between 1997 and 2022, Verdad researchers found “little to no evidence of persistence in earnings growth, beyond chance, over the long term.” They also found that both internal company projected earnings growth rates and Wall Street analyst projections are rarely correct, and on average, growth stock earnings don’t outpace value stock earnings.
  • The key to identifying successful growth stocks, according to the researchers, is identifying stocks whose price-to-earnings multiple is still expanding. Perhaps a statement of the obvious, and this year has served as a reminder that multiples can’t expand forever.

Why Learn History? Verdad’s study isn’t exactly original. Rather, it’s a re-creation and reaffirmation of a landmark study published in the prestigious Journal of Finance in 1997 that, while analyzing the previous 25 years of stock market history, came to nearly exactly the same conclusion. Perhaps meme stocks are a quarter-century thing.