A basket of money-losing tech stocks compiled by Goldman Sachs is down 62% this year
Author of the article:
Bloomberg News
Ryan Vlastelica
Publishing date:
Nov 21, 2022 • 7 hours ago • 3 minute read
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U.S. Federal Reserve chair Jerome Powell. Photo by Win McNamee/Getty Images The brief record rally this month in shares of unprofitable and highly valued technology companies is starting to look like a short-lived blip amid a steady drumbeat of hawkish commentary from United States Federal Reserve officials.
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A basket of money-losing tech stocks compiled by Goldman Sachs Group Inc. jumped 15 per cent on Nov. 10 after a report showed U.S. consumer-price inflation cooled in October more than forecast. The news led to speculation the Fed had room to slow its pace of interest-rate increases.
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Investors tried to keep pushing the stocks higher: A similarly positive report on producer prices led to a smaller pop last week. But the index has since faltered, leaving it below where it closed on Nov. 10. It sank 2.8 per cent on Monday, on track for a fourth straight decline. The Nasdaq 100 Index fell 0.5 per cent.
Rising rates have hammered tech stocks broadly this year, but riskier companies have been hit especially hard. It’s a dramatic reversal from the steady climb they enjoyed during the pandemic, when economic stimulus and the Fed’s easy-money policies spurred a flurry of speculative buying.
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“There are people who will buy almost anything on any sign of good news, and a ‘dash for trash,’ where people jump into junky or unprofitable stocks, is a classic thing to see on days like that,” said Randy Frederick, vice-president of trading and derivatives for Charles Schwab Corp.
“While it’s never a great idea to be in low-quality names, these look especially risky now as the conditions for speculation have reversed.”
The Goldman basket is down 62 per cent this year, while the Nasdaq 100 is down 29 per cent. Among notable names, C3.ai Inc. is down 60 per cent, SentinelOne Inc. has dropped 68 per cent, and Asana Inc., Okta Inc. and UiPath Inc. have all collapsed more than 70 per cent. Even after their declines, all trade at a premium to the Nasdaq 100 in terms of price to estimated sales.
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Higher rates hurt shares of unprofitable and high-valuation growth companies the most, because their shares are priced on their prospects far out in the future, with bond yields used to discount into today’s dollars the value of earnings that companies may not see for years.
Inflation, along with the Fed’s attempt to combat it by aggressively raising rates, has led to Treasury yields jumping from 1.5 per cent at the start of the year to 3.76 per cent, and recently hitting their highest since 2008.
In the latest sign the Fed may not be about to reverse course, Federal Reserve Bank of St. Louis chief executive James Bullard last week said the U.S. central bank should raise interest rates to at least five per cent to 5.25 per cent to combat inflation, well above the current 3.75 per cent to four per cent.
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The comments followed a similar statement from Federal Reserve Bank of San Francisco chief executive Mary Daly. Fed governor Christopher Waller expressed openness to the central bank raising rates by half-a-percentage point next month, less than recent increases of 0.75 points, but he downplayed the significance of the consumer price index report.
Recommended from Editorial Markets keeping you up? Try this different goals-based investing approach Five investing lessons so you can be prepared for the next market event FP Answers: How do I use stock losses to lower my income taxes? Here’s what seven investment giants with $2.3 trillion in assets are betting on in 2023 “I cannot emphasize enough that one report does not make a trend,” he said. “It is way too early to conclude that inflation is headed sustainably down.”
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Article content If the Fed does maintain an aggressive strategy of hikes, the yield headwind could grow more pronounced. And while rapidly climbing sales led to these stocks receiving nosebleed valuations, the prospect of a recession has diminished their attractiveness on growth characteristics, giving investors another reason to focus on companies with positive earnings and cheaper valuations.
Jim Awad, senior managing director at Clearstead Advisors LLC, expects investors will sort tech stocks into two categories: companies with durable earnings and cash flow, which should regain their losses over time, and then the speculative, unprofitable ones.
“Investors will remain gun shy about the second class of company,” he said. “They got so overvalued, they’ve fallen so much, and some investors have been devastated. The momentum game is over. They can maybe bounce from here, but they won’t be market leaders the way they were before the peak.”
Bloomberg.com