Time to Go In?
In the past year, we’ve all enjoyed our portfolios. However, no one has had a better time than growth investors. Momentum stocks have had a wild ride, multiplying their share value in a matter of months. Fueled by continued optimism of a world moving towards technology, indexes have felt this also. The NASDAQ 100, an index consisting of growth stocks, has given returns of nearly 100 percent since the COVID-19 stock market crash. Unfortunately, the last couple of months haven’t been so nice at all.
Ever since February, the market has been witnessing a phenomenon called sector rotation. Simply put, investors often move their money into a different sector to adjust their risk and find better opportunities. In this case, investors are moving their money out of tech and into cyclical stocks. Cyclical stocks tend to flourish when the economy is doing well, and that is the case with the US currently. Along with that, the risk to reward in technology isn’t the best now due to high valuations.
This has left many technology stocks lagging behind the Dow and S&P on the year, and some of it is truly justified. Various tech stocks were sitting at absurd valuations, which warranted a fall in share price. Many have fallen into a correction, even as tech earnings seem to be promising. However, as Warren Buffett puts it, be greedy when others are fearful. Well, Buffett might not be the best example as he doesn’t like to invest in tech, but the saying still stands. Oftentimes, sectors fall as a group, even though parts of it are the ones struggling. This leaves many opportunities to be seized in fundamentally sound companies whose share prices have fallen by a lot. For example, Appian, a cloud computing business, is down nearly 60 percent from its highs in February, and even though it was a bit overvalued, it provides a possible entry point into a solid company.
Although growth investing is often intertwined with technology stocks, momentum opportunities exist in other sectors. As another example, take Redfin, a real estate company. They can be classified as a disruptive growth company in their area of business, and they’ve been the victim of sector rotation too. Growth stocks have been affected in other sectors also, which can serve as a tool of diversification for you as keeping all your money in the technology sector isn’t the best idea. Do you think that it is the right time to buy the dip, or is there more to come?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
