Investor insight #10: A stock picker’s market

Sunday 21 February 2021

Investor insights

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Recent bouts of market volatility have confirmed the continuation of an uncertain economic environment that investors must grapple with until the world can get the COVID-19 pandemic under control. Though a new form of volatility continues to grow in presence – the rise of retail investors and their impact on individual companies specifically and financial markets more broadly. Definitions of retail investors vary but they are generally considered to be non-professional market participants who invest their own money.

Speculation driving prices

According to Bloomberg Intelligence, retail trading accounted for only 10.1% of total trades in the US in 2010 and that number rose to 14.9% by 2019. A mixture of lockdowns, work-from-home, higher savings rates, large stimulus checks, and lack of sports betting has created the environment for that proportion to more than double over the past twelve months, with retail trading now accounting for over 30.0% of trades in 2021 according to Credit Suisse.

A second data point for the increased volatility are average trading volumes. In a recent interview on CNBC, Managing Director at Piper Sandler, Richard Repetto, observed that trading volumes have more than doubled year-over-year and some brokerage firms are handling 3-4 times more transactions than historical norms. The increased trading activity may reflect an uncertain operating environment and outlook for businesses but it also points to increased speculation from these retail investors in specific companies and industries. Although some invariably have large and long runways for growth, valuations have been very difficult to reconcile with current market prices in many cases. Even if they capture most of the opportunities within the industries they are disrupting, expand into new areas of business and execute perfectly, some prices are currently implying a low or negative return over the next 5-10 years, certainly below our minimum hurdle rate and with less certainty. Electric Vehicles (EVs) and Buy-Now-Pay-Later (BNPL) are a couple of spaces that come to mind here.

A third data point also suggests increased speculative activity with record trading through options contracts – the tool of choice for these new players trying to make a quick buck – with almost 40 million contracts traded per day in January. We previously reported on retail investor’s foray into GameStop and advised readers to stay clear. If you haven’t read it yet, click here. As expected, many budding new entrants were burned, ironically by the very forum trying to stand up for retail investors. Their channel name, r/WallStreetBets (WSB), was an ominous sign but some bet the wrong way and the share price has since dropped from its high of $347 to less than $50 today. Early speculators may have gained handsomely if they sold at the right time but even the lucky ones should heed the warning that the house always wins in the long-run when making bets. So what is the latest company or industry giving Reddit investors a high you may ask? Cannabis stocks. Go figure.

And finally, there is the surge in cryptocurrency prices. By way of example, the Australian inventor of Dogecoin, Jackson Palmer, recently admitted to the Wall Street Journal that it was a complete joke and that he has since given away his coins years ago. “It doesn’t make sense. It’s super absurd. The coin design was absurd.” After a pump up from the infamous Reddit gang, as well as a combination of tweets from Elon Musk and Snoop Dogg, the value of Dogecoin recently hit a total market cap of AUD $10 billion. Not bad for an asset invented by a bored Aussie as a “piss-take”. Elon may have sent the crypto price rocketing into outer space like a Falcon 9 but if you’re an owner, don’t hold for too long, lest you get burnt and are left in the doghouse with Snoop.

Its a stock pickers market

Some companies and pockets of the market appear frothy, but not all. This is a stock picker’s market more than at any other time over the past decade. The pandemic has changed the economic landscape and some companies will indeed benefit substantially from changing trends and persistent tailwinds. There will undoubtedly be winners and losers but importantly, even the winners have a price if you want to generate a return on your investment, as demonstrated by our recent choice to sell portfolio holdings such as Apple and Starbucks when prices far outweighed valuations. Following the herd and chasing short-term returns can be a dangerous game. Strong stampedes into investments are often followed by even stronger and faster exits, with fear eventually displacing FOMO for those that arrived at the party a little too late. Choose your investments wisely. Alternatively, chart a course with a manager you can trust.


About the Author
Denis Vukovac, CFA

Denis Vukovac, CFA

Investment Analyst

Denis joined the investment team in January 2020 and is responsible for research projects related to the Portfolio including concentrated analysis of companies being considered for inclusion. Previously Denis directed business development for Seismic Asia Pacific working with technology partners across the Asia Pacific region. He also worked in the mining industry and spent eight years in the Australian Defence Force including two deployments in Afghanistan.

Denis earned the right to use the CFA designation granted by the CFA Institute in 2021. He holds a Bachelor of Commerce (Distinction) from Griffith University and was a member of the Griffith University team who were runners up at the Australian National Finals for the CFA investment research challenge in 2018.