Investors over the past month have massively shifted from growth to value stocks, potentially creating a trading opportunity for stock pickers sifting through the recent carnage, investment research firm TrimTabs says.
The Sausalito, Calif., firm, which tracks stock market liquidity, including mutual fund and exchange-traded fund flows, announced Monday that growth ETFs have redeemed $5.6 billion, nearly 5% of assets, while value-oriented ETFs have issued $3.9 billion, close to 3% of assets.
The sector rotation marks a “huge” change in trend, according to TrimTabs CEO David Santschi, who told ThinkAdvisor, “We think investors are starting to re-evaluate the prospects of the higher growth companies, particularly cloud computing, social media and biotech companies.”
While acknowledging that one can only speculate as to what is motivating investors, Santschi says a three-step process seems to be occurring, and he has a high degree of confidence based on historical patterns on the first two steps:
“It really started before tax day on April 15,” he says of the first step. “We expected a selloff before tax day and that’s exactly what happened. People were selling before tax day to pay taxes… The market’s generally weak in the days before tax day.
“But the selling continued — perhaps because of poor performance of these IPOs in these [cloud computing, social media and biotech] sectors and Fed tapering,” says Santschi, who regards the persistent selloff as the second step in the massive roations, and as a significant departure from investor sentiment over the past year, which heavily favored growth over value.
“[IPO] deals with weak pricing and poor performance have caused people to re-evaluate valuations and start looking harder at this stuff,” he adds, speculating that investor re-evaluation of growth is the third step in the massive rotation now under way.
Santschi says that investors are seeking perceived safety: “In the tech space, that’s things like Microsoft (MSFT), Oracle (ORCL), Cisco (CSCO); in non-tech, that’s Exxon Mobil (XOM), Procter & Gamble (PG) and utilities of various kinds.”
While Santschi is adamant that such companies are “bubbly,” he is actually quite bullish on the market, most especially about prospects for solid growth companies dumped along with the wobbly ones.
But he emphasizes that TrimTabs’ bullishness is not because the Bay Area firm thinks the market is cheap — to the contrary, Santschi says it’s overvalued — but rather because the liquidity factors the firm tracks are bullish for the short and intermediate terms.
“We’re traders, not investors,” he says, adding that money flows, sentiment and supply-and-demand factors such as corporate buybacks of shares are very bullish.
Santschi says a fund based on a TrimTabs model portfolio (the Turk Capital U.S. Equity Long-Short Strategy) that has outperformed the S&P 500 every year since it launched in 2008 is one way for advisors and accredited investors to use the firm’s distinctive liquidity-based research.
While the TrimTabs CEO is upbeat about the short term, he is outright morose about the long-term prospects for a market in which easy-money induced “malinvesting” is quite prevalent.
“If you didn’t have massive money printing and zero rates, nobody would be lending money at [today’s] levels,” he says. “Bankruptcy law firms and restructuring companies are letting [employees] go because there isn’t enough work.”
Santschi calls the malinvesting a “major” market theme — “but it’s not in all areas of the market. You see it a lot in tech; that’s the single best sector where you see the craziest stuff,” he says, citing cloud computing and social media companies in particular.
“The basic model in Silicon Valley world is you raise money; try to get a lot of users and try to figure out later how to make money from them.”
These firms tend to rely on subscriptions or advertising, but often can’t make money sufficient even to cover their costs, Santschi says.
And yet, they have been drawing massive funds, he says, “from the free money” the Federal Reserve has made available to venture capitalists.
“All this money is getting printed and chasing all this nonsense, Santschi says. “Venture capitalists tend to be very good at flagging the top of the market … but investors said last month 'We’ve had enough; we’re not going to pay for this nonsense.’”
A similar phenomenon is taking place in real estate, where easy money funneled by the Fed through private equity firms like the Blackstone Group has fueled bubble markets in places like Phoenix, Las Vegas and parts of Florida, Santschi says, citing “buy-to-let schemes in these bombed-out markets,” which today are “way overvalued.”
“They can’t make money in banks or in bonds, so they buy real estate,” he says. “We’re in another bubble — just in a different kind of bubble — a generalized kind of credit bubble that they’ve created.
The investment analyst, whose models seek short- and intermediate-term trading opportunities, says he doesn’t know when this bubble will burst.
“It can probably last as long as borrowing costs, interest rates stay low," he says. "If you could earn 4% on a savings account, or pay 8% for a mortgage, you wouldn’t have people bringing profitless companies in San Francisco to market and making billions off them. Nobody would give them money. And Blackstone wouldn’t be buying thousands and thousands of rental properties; prices would collapse.”
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