Bubble stocks go into ‘hyperdrive’ mode

Bubble stocks go into ‘hyperdrive’ mode by Michael McKenna
The so-called ‘bubble stocks’ continue to do well as the speculative fever continues in technology and green stocks following the Democratic majority in US Congress. But for how can it last and will the reflation trade burst the bubble stocks?

Last year we wrote about ‘bubble stocks’ where we highlighted many high EV/Sales were experiencing a bull market defying historical patterns in equities and not seen since the years during the dot-com bubble. The high priced equites have continued to do well since our analysis, but with Tesla shares rising 16% this year already and up another 4% again today in US pre-market session we have to ring the alarm again on ‘bubble stocks’ as history suggests an ugly end to such a speculative rally. While we have no idea about the timing of this, we guess that the correction will be linked to higher US interest rates and we encourage every investor to monitor the development in rates.

In case of Tesla the recent rally is fuelled by speculative sentiment in ‘green stocks’ as investors are betting that the new Biden administration will provide a significant tailwind for these companies through new subsidies and regulation. In our Q1 Outlook, which will soon be released, we touch on the ‘green transformation’ trade and highlight the various speculative aspects of this theme. We still think that the ‘green transformation’ will be one of the biggest trends in financial markets over the next 10 years, but this year we will most likely see a split of the ‘green trade’ into that of ‘green quality’ vs ‘green speculative’. The speculative green stocks will also be found in the high EV/Sales bucket, so the phenomenon of ‘bubble stocks’ has spilled over into other parts of the economy than that of Silicon Valley companies.

High EV/Sales stocks have severe drawdowns during corrections

As the backtesting on Russell 1000 shows, low EV/Sales stocks (value stock) normally do better than high EV/Sales stocks (growth stocks) but since 2014 value stocks have underperformed massively as investors have increasingly been bidding up valuation multiples on high growth stocks as interest rates have plunged. The last time we saw value vs growth plunge to this degree was during the dot-com bubble years, but we all know how it ended. The high EV/Sales stocks as group experienced an 80% drawdown compared to around 53% for the other quintiles in the Russell 1000. The spread between the two groups (long value stocks and short growth stocks) rose during the drawdown years after 2000 and again during the great financial crisis. Our bet is that the same will happen again, we just do not know the timing. It can be difficult to see in the chart but the spread bottomed in August 2020 and has since gone up (value stocks outperforming again) which is related to rising interest rates and the reflation trade.

The table below shows the US and European companies with market value above $10bn that have the highest EV/Sales ratio but sorted on market cap. The list highlights many well-known stocks mostly in the technology industry but a few green stocks have also entered the list, a big change from May 2020 when first wrote about ‘bubble stocks’. Many retail investors have very concentrated portfolios and as such many retail investors will have got significant wealth accumulation from holding a few concentrated positions in some of the stocks in the table. Prudent risk management principles include diversifying across many holdings that are not too correlated and avoid obvious risk sources. We identify high EV/Sales stocks right now as one of the most dangerous risk sources out there in the equity market and we encourage investors to think hard about how much risk they are willing to take a few speculative names.

Name Market Cap (USD mn,) EV/Sales T12M Total Return 5Y Price P/E
Microsoft Corp 1,650,381 10.85 358.49 218.29 35.0
Tesla Inc 773,525 27.52 1792.05 816.04 1,292.9
Visa Inc 515,171 24.25 199.68 213.81 40.6
Mastercard Inc 348,784 22.50 293.78 349.86 51.9
NVIDIA Corp 330,397 22.19 1701.46 533.76 75.2
PayPal Holdings Inc 275,394 13.35 609.45 235.04 103.1
Adobe Inc 229,181 17.71 436.12 477.74 44.0
Pinduoduo Inc 221,661 31.99 180.12
ASML Holding NV 206,982 12.33 454.70 403.90 52.1
Prosus NV 166,596 40.01 83.76 40.0
McDonald’s Corp 157,949 10.68 108.58 211.98 32.7
NextEra Energy Inc 155,335 11.36 244.27 79.29 35.5
Texas Instruments Inc 154,159 11.32 271.42 167.94 32.0
Shopify Inc 142,032 55.64 4126.72 1470.90 1,553.5
Advanced Micro Devices Inc 114,450 13.10 4082.86 95.16 106.7
Hermes International 112,895 14.82 206.45 875.40 83.2
Square Inc 107,990 14.02 2045.88 239.48
Sea Ltd 104,249 28.69 203.94
ServiceNow Inc 99,776 23.46 542.15 511.41 137.5
Zoom Video Communications Inc 97,957 49.13 342.50 234.9
Intuit Inc 96,856 11.96 307.79 368.63 49.5
American Tower Corp 96,616 16.28 150.37 217.50 49.5
Intuitive Surgical Inc 95,010 20.97 351.60 808.21 99.7
Orsted AS 93,559 10.45 1355.00 37.8
Booking Holdings Inc 91,733 10.01 91.90 2239.85 91.2
Airbnb Inc 91,132 25.41 151.27
Snowflake Inc 86,119 166.72 304.20
NIO Inc 85,374 43.87 54.28
MercadoLibre Inc 79,542 23.39 1462.56 1597.97
Zoetis Inc 79,370 12.78 270.89 167.00 43.6
S&P Global Inc 79,174 11.40 280.85 329.07 29.6
Snap Inc 78,135 35.89 52.44
Blackstone Group Inc/The 75,498 18.23 219.35 63.23 55.7
CME Group Inc 71,371 15.04 171.90 198.81 32.3
Prologis Inc 70,402 21.76 166.08 95.32 79.9
Autodesk Inc 69,309 19.12 463.06 315.20 162.6
Crown Castle International Corp 65,751 15.73 117.46 152.45 81.5
Intercontinental Exchange Inc 65,002 14.51 142.77 115.81 29.8
Adyen NV 63,562 16.28 1714.50 273.7
Equinix Inc 60,497 12.23 146.73 678.97 103.4

Source: Bloomberg and Saxo Group

Topics: Equities Tesla Motors Technology United States Europe

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