One of the big stories of the year has been the collapse of momentum stocks.
Red hot areas like social networking, biotech, and fuel cells have gotten destroyed.
So what if you’ve been holding these stocks all the way down? Will they bounce back?
In his latest Weekly Kickstart note, Goldman’s David Kostin has some bad news. The momentum stocks of yesterday don’t quickly become the momentum stocks of tomorrow. Once that story is over, that story is over.
‘Indiscriminate selling’ is the phrase that most accurately captures the view of many investors regarding the momentum drawdown since early March. Fund managers argue that the broad sell-off in high expected growth stocks affected some firms that in their view did not merit a de-rating. However, once significant momentum drawdown occurs, the momentum factor is typically not associated with subsequent market leadership although the S&P 500 gains an average of 5% during the next six months. Instead, low momentum, low valuation, and low growth are usually winning factors.
Similarly, buying stocks with the highest EV/sales ratios typically underperforms the S&P 500 during the following 1-, 3-, and 5-year periods, regardless of the sales growth that is actually delivered. In contrast, low EV/sales stocks typically beat the market over the same time horizons irrespective of the revenue growth that is delivered.
So there are two factors working against those former red hot stocks. One is that momentum doesn’t typically comeback. The other is that buying stocks with high enterprise value-to-sales ratios isn’t generally a winner after a market regime change.
So if you’re holding on to some of these names, there’s a good chance, according to Goldman, that you’re holding on to dead money.
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