Chart Room: Retail investors pile into the fastest growing stocks

Chart Room: Retail investors pile into the fastest growing stocks

‘Big Growers’ are the 75 stocks with the best all-round growth credentials, and retail activity in this space is approaching historically high proportions. Among the top retail stocks, the share of trading activity in Big Growers is currently over 30 per cent, well above the 10 per cent of the market these stocks represent if we were to do a ‘random draw’.

 

Big Growers change over time, but recent ones include Netflix, Shopify and NVIDIA. Looking back, retail’s share in Big Growers has rarely sustained beyond the 30 per cent level, and has twice preceded a turbulent period for markets. In March 2000 when the Nasdaq topped out, retail buying of high growth names continued for months beyond the peak (to nearly 50 per cent) before collapsing as the dotcom crash took hold. More recently, in 2015, there was increased buying of growth stocks into the second ‘taper tantrum’ downturn, which triggered a sell off - equity markets took around a year to recover.

Retail buying activity is not just skewed to the top momentum stocks, but also the bottom. Recent data shows how users of Robinhood are increasingly seeking contrarian names, those most out-of-favour. These companies at either end of the scale - the fastest growing stocks and the worst performers - often generate the most media attention. But concentrated buying at each end of the scale is making the outliers increasingly expensive, and leaving opportunities for investors elsewhere.

The attractive, ‘boring’ middle

The skew has created a pool of companies in the middle with good growth characteristics but underappreciated by the market - as a result, they are priced relatively attractively. ‘Boring’ companies that are underpinned by strong fundamentals represent safer ground for the long-term and are not so tied to shifts in momentum.

In the short term, retail’s growing tendency towards stocks at the extremes could be set to continue as the next round of US fiscal stimulus payments filter through - potentially increasing the market skew yet further. While this strategy can work over certain time periods, any market correction is going to hurt, particularly in those high growth names on lofty valuations. The stimulus feel-good factor will not last forever, and there may come a time when the ‘boring, underappreciated middle’ is back in vogue.

 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

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