- Small investor portfolio (+61%) beating institutional investor's (+45%)
- Increase in retail trading activity has boosted cyclical, value stocks
- Analysts bearish on Energy sector, Tech expected to keep outperforming
- Valuation dispersion widest since dot-com bubble last month
Stocks popular among individual investors are beating hedge fund and mutual fund picks, according to a new note from Goldman Sachs. The bank's basket of retail favorites has surged 61% since the bear market trough. This is compared to the 45% gain for institutional investor picks and the 36% rise for the S&P 500.
The biggest winners in Goldman's Retail Trading Favorites Basket since March 23 are Penn National Gaming (+184%), Moderna (+127%), Tesla (+124%), MGM Resorts International (95%) and Royal Caribbean Cruises (+93%).
"The narrative of Main Street weakness vs. Wall Street asset inflation is misleading," wrote analyst David Kostin and others. "The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks."
While Energy stocks are the "biggest laggards" this year and best avoided, Tech is the "unrivaled market leader" and is expected to keep outperforming, according to analysts. "As the market was falling, the sector was supported by its quality attributes, including strong balance sheets and high profit margins, as well as the resilience of its earnings. This year analysts have revised down Tech 2021 EPS by just 5%, compared with a 20% cut for the remainder of the S&P 500," they wrote. Tech companies are also benefiting from low interest rates, which increase the value of the sector's long-term growth prospects.
Goldman also pointed out that despite value stocks rallying, valuation dispersion remained the widest on record last month outside of the Tech Bubble peak. Big gaps in valuations signal long-term opportunity for value investors, say analysts, but getting the timing right is hard. They recommend investors include some value exposure in their portfolios. "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."