’Bubble stocks’, biggest 3-day VIX move since March and crowding out of banks

Our regular readers will know we have been saying for weeks that a bubble might be developing fast in US technology stocks fueled by significant new trading account opening driven by zero commission. While dividend futures on S&P 500 suggest that profitability will take a massive hit over the coming years US technology stocks have been immune. Even a stock such as Tesla, where the co-founder and CEO Elon Musk has said that the stock is overvalued, has continued to rally higher. With risk sentiment changing we want Saxo clients and investors in general to acknowledge the potential dangers in these so-called ‘bubble stocks’. If you have exposure to these stocks we recommend investors to apply strict risk management on these stocks as they are at risk of a major correction. The catalyst is a technical change in risk sentiment and then catapulted by one-way buying behaviour, concentration risk by hedge funds in these stocks and the large degree of new retail money that has flowed into this segment.

The table below shows 50 ‘bubble stocks’ traded on US exchanges. Our criteria has been minimum $5bn in market value, positive return this year and then sorted on 12-month forward EV/Sales from highest to lowest. What is striking is that absence of the FANG+ stocks but as we have pointed out the big bubble is in the large technology landscape just below the mega-caps although some of the names have high market values such as NVIDIA, Adobe, Shopify, Keyence, ServiceNow and Zoom Video Communications.

If you take the Russell 1000 Index and divide the index members into deciles on EV/Sales and measure the performance of the most expensive against the cheapest stocks on this metric then cheaper has been over time. But we observe two periods of growth stocks outperforming and that’s the period Feb 1995 to Feb 2000 and then again from Nov 2013 to Apr 2020. Significant outperformance of highly valued growth stocks tends to run out of speculative fuel when realized performance by the growth companies cannot meet the lofty expectations. The dot-com collapse caused the highest decile on EV/Sales to experience a 91% drawdown. It’s this dramatic turn of events we would like to warn investors about.