The story of the remarkable stock market gains in 2013 was the outperformance of lower-quality, speculative growth stocks. Indeed, this is been the story for the duration of the current five-year bull market. In the first quarter of 2014, however, this story changed, as higher-quality, slower growing value stocks have taken the lead and growth stocks have slowed. In particular, two of the speculators’ darlings, the biotech and internet sectors, have suffered pronounced corrections. The Financial Times reported the shift last week, and the Wall Street Journal picks up on it today.
It’s too early to say whether this shift will set a real trend, or whether it is a momentary pause in growth stocks’ momentum. In spite of the Fed’s gradual tapering, there still is plenty of money being pumped into the market by the Fed and other central banks, and investors’ hunger for price returns in a slow growth economy still translate into an appetite for risk. Consider yesterday’s IPO of GrubHub, Inc., which processes online take-out food orders for restaurants. GrubHub priced its offering at $26, which gives it a market capitalization of $2 billion. At this price, the company is valued at about 15 times its revenue and 359 times last year’s earnings. This valuation is insane even by internet company standards. Bloomberg reports, “E-commerce companies in the U.S. fetch an average of 2.5 times last year’s sales, while Internet services companies trade at over 6 times.” GrubHub itself says that its main competitors are traditional restaurants; the Bloomberg U.S. Full-Service Restaurant Index is priced at about 1 times sales.
One big factor in how the remaining three quarters of 2014 will go is the retail investor. So far this year, net flows into U.S. domestic stock mutual funds have outpaced all the inflows into mutual funds last year, according to the Investment Company Institute. This is probably a sign that the bull market is getting long in the tooth, but even so, the inflows into stock mutual funds from 2013 and 1Q 2014 together (about $38.4 billion) pales in comparison to the $810 billion that investors pulled from stock funds between 2009 and 2012.