Though the markets currently possess several vulnerabilities, there remains plenty of potential for investors, said ERShares’s COO and chief investment strategist Eva Ados in an interview with TD Ameritrade.
“It’s a stock picker’s market right now,” she said. “There are opportunities in value, and there are opportunities in growth.”
In the current markets she recommends a selection of the FAANGS: specifically, Facebook (FB), Google (GOOGL), and Amazon (AMZN). These companies are the “best of both worlds” in terms of growth and value, and they have been able to capitalize on the switch to e-commerce because of the pandemic, said Ados.
They’re “behaving like a regular growth stock,” with modest P/E ratios and valuations coupled with extraordinary growth. Facebook reported 50% revenue growth with a P/E of 25, Google reported 30% revenue growth with a P/E of 28. Meanwhile, Amazon reported 45% revenue growth and an EBIT growth of 35%.
“You have extraordinary margin when it comes to Amazon, and all of these companies,” said Ados.
Few Earnings Surprises for Tech
Broadly speaking, the tech sector isn’t participating much in earnings winnings, because earnings were coming from such a high base already. “It’s really hard to see earnings surprises” right now, said Ados.
As a result, investors are chasing value stocks still offering tantalizing earnings, but Ados warns that the value factor is coming from a low base.
“The danger there,” she explains, “is that we are pushing them to frothy levels.”
These tech stocks may never reach the levels they were at before the pandemic because our behaviors have changed, putting their business models at risk of high debt leverage, drastically decreased revenues, and even bankruptcy.
“We don’t think that chasing value companies just on the basis of earnings surprises is the right thing to do right now,” she added.
Risks Persist in the Market
The market has swung from growth to value quickly, says Ados. Hyper growth tech peaked on February 20th; then in mid-March deep discount value peaked; and now the broader indexes have peaked, hitting all-time highs.
“As a result, now the system is very vulnerable to any shock,” she added. The risks in the short-term include new mutations of the coronavirus, and whether or not vaccinations will work on them.
Another concern is the behavior of the retail investor. The recent record influx of retail investors to platforms such as Robinhood has led to markedly increased investing around specific companies. Millennials tend use online forums and social media to communicate about their ideas “and as a result they crowd the same names,” explains Ados.
These investors have collectively pushed specific growth companies higher. The thing to watch for, she adds, is a potential mass exodus from these same companies, causing them to “drop significantly.”