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‘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.