It’s a year since Saxo Bank refined its “bubble stocks basket”, since when the stocks are collectively down 55.2%.
The basket comprises stocks that are, in Saxo’s view, “aggressively valued”. Looking at stocks listed on exchanges in North America, Western Europe, Japan, Hong Kong, Singapore, and Australia, Saxo filtered on market capitalisation (above US$ 2bn); stocks that have a negative 12-month forward expected earnings per share (EPS); and shares with a 12-month forward enterprise value (EV)/Sales (enterprise value to sales) ratio that is above 8.
(Enterprise value is simply the market capitalisation of a company adjusted for debt and cash.)
Happily – or perhaps not – none of the stocks that filtered through were British stocks. Relatively well-known stocks in the list included Airbnb (NASDAQ:ABNB), Draftkings and Roku.
As Saxo’s head of equity strategy, Peter Garnry, observed, the list is dominated by US and Chinese stocks with the majority within the biotechnology, software, media, and gaming sectors.
“The combined market value for this group is stunningly $1.6trn but even more usual, the average price target is 6.5% below the current price which is something that rarely happens in equity markets as equity analysts typically have a positive bias in their recommendations and price targets. The average forward EV/Sales ratio is 30.7x which is around 10 times higher than the S&P 500 which is one of the most expensive equity indices in the world,” Garnry wrote a year ago.
So, what’s changed?
Well, not a lot in many ways. Saxo’s hypothesis was that higher interest rates due to inflationary pressures would severely pressure these stocks, and so it has proved.
“In many ways the collapse in bubble stocks fell like an echo from the dot-com bubble days and the downward pressure may continue,” Garnry warned.
For what it is worth, the collapse in valuations have seen 26 stocks fall out of the list; in other words, they are no longer basket cases. Included in those falling out of the basket are the aforementioned Airbnb, Draftkings and Doordash.
“Many of these companies still have market capitalisation above US$2bn and negative earnings expectations, but they have fallen a lot over the past year combined with revenue growing such that their 12-month forward EV/Sales ratio has gone below 8x,” Garnry explained.
Replacing the 26 stocks ejected from the basket are 26 stocks that include among their number electric vehicle maker Rivian Automotive and online trading platform Robinhood Markets.
“The bubble stocks basket now represents US$687bn in market value, down from $1,565bn a year ago, highlighting the shareholder value destruction that has taken place in the part of the equity market. A year ago, the bubble stocks basket had a median 12-month forward EV/Sales ratio of 21.3x which has now declined to 14.6x,” Garnry observed.
A rotation out of speculative growth stocks has occurred and if Saxo’s hypothesis is correct, rising interest rates will add momentum to this trend, leading bubble stocks being “shredded en masse” and investors switching to commodity and value-related stocks.