Many technology stocks have come under pressure in an environment of high inflation and rising interest rates in 2022. Some may need to fall further.
Shorter-term investors should stay away from more volatile, innovative companies despite outperforming during the pandemic.
These include 20 of the larger, high-volatility names in the Russell 1000 Index, listed below.
Highly valued stocks are penalized
Disruptive innovation is an investment style that has grown in popularity in 2020 as so many companies chosen by money managers under this type of strategy have soared.
But the strategy has had rough times since then. Now that investors are so sensitive to any signal of higher interest rates from the Federal Reserve, these volatile stocks are best avoided, even after significant declines.
Here’s a chart showing the total return of Cathie Woods Ark Innovation ETF ARKK, -0.87%, the flagship for such stocks, since the end of 2019:
fact set
That’s quite a fall to earth. Back in December, Wood famously doubled down on her strategy, saying the stocks she held had fallen into “deep value territory.” She added that her strategy “could yield a compound annual return of 30% to 40% over the next five years.”
That was before ARKK plunged another 36% over the course of 2022 through April 8. Wood may be right that her style will be well received in the very long run. But for investors worried about the rest of 2022, the story could get even uglier.
Why rising interest rates are hitting disruptive innovators so badly
Inflation was already running high in 2021, leading investors to anticipate a change in Federal Reserve policy that would result in a cycle of rising interest rates. This anticipation reversed course for many technology or innovative stocks, which traded high at estimated earnings.
We’re seeing more of that this year. Only in March did the Fed change course when it raised the target range for the federal funds rate. The central bank has yet to announce any reduction in its bond holdings, which kept long-term interest rates low in 2020 and 2021. Still, the yield on 10-year US Treasury bills TMUBMUSD10Y, 2.780% has risen from 1.51% to 2.75%. At the end of last year.
“The market has already baked expected rate hikes two years from now,” said Robert Barone, a portfolio manager at Chicago-based Fourstar Wealth Advisors.
Of course, we have no way of knowing how long the Federal Reserve’s round of actual rate hikes and bond portfolio reductions will last, but Barone thinks some people are in for a surprise. Earlier in 2018, when the Fed tightened monetary policy, “they didn’t get very far until they siphoned off some liquidity and financial markets revolted.”
Kimball Brooker, co-head of the Global Value team at First Eagle Investments in New York, said that a rising interest rate environment can be particularly tough for disruptive innovators because they tend to have “cash flows well into the future that you price in today.”
“If you raise interest rates today, the discount on future cash flows is higher,” Brooker said.
High volatility stocks screen
This Twitter post sets the stage:
It’s been a tough year for technology. To look ahead, we started with the Russell 1000 Index RUI, -1.11% because it contains many large cap technology companies that are not yet included in the S&P 500 SPX, -1.22% or other S&P indices are. We’ve narrowed the list down to the 644 with a market cap of at least $10 billion as of December 31st. We then sorted the list by 12-month beta versus the Russell 1000 Index.
A stock’s beta is a measure of its volatility versus an index, whose beta is considered to be 1.
Here are the 20 stocks out of the 644 with the highest 12-month beta through April 8:
company | ticker | Industry | 12 month beta | Forward P/E | Price change – 2022 | Price change – 2021 | Price change – 2020 |
Upstart Holdings Inc. | UPST US | Internet Software/Services | 3.16 | 35 | -40% | 271% | 34.8 |
Rivian Automotive Inc. Class A | RIVN, +2.91% | motor vehicles | 3.01 | N / A | -63% | 34.8 | 34.8 |
Block Inc. Class A | quadrature, +0.81% | Information Technology Services | 2.87 | 87 | -24% | -26% | 248% |
Trade Desk Inc. Class A | TTD, -0.52% | Advertising/Marketing Services | 2.84 | 68 | -26% | 14% | 208% |
Bill.com Holdings Inc. | INVOICE, +0.66% | software | 2.75 | N / A | -20% | 83% | 259% |
Cloudflare Inc. Class A | Net, -0.27% | Information Technology Services | 2.61 | 2,336 | -17% | 73% | 345% |
Carvana Co. Class A | KVNA, +0.19% | specialty shops | 2.45 | 35 | -54% | -3% | 160% |
Nvidia Corp. | NVDA, -5.44% | semiconductor | 2.39 | 38 | -21% | 125% | 122% |
MongoDB Inc. Class A | MDS, -0.64% | software | 2.38 | 35 | -21% | 47% | 173% |
Unity Software Inc. | U, +0.02% | software | 2.33 | 35 | -37% | -7% | 34.8 |
DoorDash Inc. Class A | DASH, -3.19% | Internet Software/Services | 2.31 | 35 | -29% | 4% | 34.8 |
Wolfspeed Inc. | WOLF, -1.00% | Electronic components | 2.31 | 12,673 | -7% | 6% | 129% |
Snowflake Inc. Class A | SNOW, +1.12% | software | 2.25 | 969 | -38% | 20% | 34.8 |
DraftKings Inc. Class A | DKNG, +2.44% | Internet Software/Services | 2.21 | 35 | -40% | -41% | 335% |
Global Foundries Inc. | GFS, -1.39% | semiconductor | 2.21 | 27 | -16% | 34.8 | 34.8 |
ON Semiconductor Corp. | ON, +0.09% | semiconductor | 2.15 | 13 | -22% | 108% | 34% |
HubSpot Inc. | HUBS, +3.01% | Information Technology Services | 2.15 | 166 | -34% | 66% | 150% |
Datadog Inc. Class A | DDOG, +0.80% | software | 2.13 | 231 | -25% | 81% | 161% |
DocuSign Inc. | DOCU, -0.08% | software | 2.13 | 50 | -33% | -31% | 200% |
Olaplex Holdings Inc. | OLPX, -3.75% | Household/Personal Care | 2.11 | 27 | -47% | 34.8 | 34.8 |
Source: FactSet | |||||||
Click on the tickers to learn more about each company.
Click here for Tomi Kilgore’s in-depth guide to the wealth of information available for free on MarketWatch’s price page.
The table includes price-to-earnings ratios that are unavailable for many of the companies as analysts polled by FactSet are expected to have negative consensus earnings estimates for the next 12 months. In comparison, the forward P/E for the iShares Russell 1000 ETF is 20.8.
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