Retail equity investors may be outperforming investors with far more expertise as markets grapple with the coronavirus fallout and recovery.
A report from Goldman Sachs Group showed that a portfolio of stocks popular among retail investors surged 61 per cent since bear market trough, compared to a 45 per cent gain seen for stocks favoured by mutual funds and hedge funds and an overall rise of 36 per cent for the S&P 500.
“The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks,” the report noted. “Despite the recent value rally, the dispersion of stock multiples is still extremely wide relative to history. The gap in valuations between the highest and lowest multiple stocks now registers in the 93rd percentile; last month it was the widest on record outside of the tech bubble peak.”
The basket of 40 retail-preferred stocks showed almost exclusively double digit returns since March 23, with three exceptions that posted negative yields. The outsized return for the period was propelled especially by its top performers, including gains from Penn National Gaming, Inc. (184 per cent), Moderna, Inc. (127 per cent) and Tesla Inc. (124 per cent).
The dispersion signals long-term opportunity for value investors, the report said, noting current volatility in markets makes finding and timing the execution of those opportunities difficult. “We believe most investors should include some value exposure in their portfolios, although the degree will depend on time horizon and risk tolerance, among other factors. In the medium-term, the challenge is determining which laggards are value opportunities and which leaders will experience fundamental growth that justifies current elevated valuations.”