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Theme basket review: Cleanup in bubble stocks amid historic plunge

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  By sheer coincidence we launched our current bubble stocks basket on the 12 February 2021 which happened to be the exact day when the Ark Innovation ETF peaked on close prices. Since then our bubble stocks basket is down 55.2% in what has been a bloodbath among these speculative growth stocks as interest rates have charged higher on rising inflationary pressures. The plunge in bubble stocks has caused a dramatic cleanup of the basket as former bubble stocks are no longer meeting the criteria with 26 out 40 stocks leaving the basket.


Echo from the past

Our bubble stocks basket was a high-flying basket in the beginning of last year, but the gradually higher interest rates and inflation pressures driven by higher energy prices forced investors to rethink equity portfolios. As a result a rotation process was set in motion which led to bubble stocks (speculative growth stocks) to be shredded in masse while commodity and value related stocks were increased in portfolios. This rotation is very clear when you look at 1-year performance and year-to-date performance among our theme baskets.

We introduced our bubble basket on 8 January 2021 and updated our methodology during early February publishing a renewed basket on 12 February 2021 in which we warned of bubble stocks. In a striking coincidence the 12 February 2021 happened to be the day when the Ark Innovation ETF peaked on close prices. Since that day almost a year ago, our bubble stocks basket is down 55.2%, slightly more than the Ark Innovation ETF down 53.4%, basically behaving as we warned about in February 2021 that higher interest rates due to inflation pressures would severely pressure these stocks. In many ways the collapse in bubble stocks fell like an echo from the dot-com bubble days and the downward pressure may continue.

As the long-term chart also show, the bubble stocks basket is currently back to levels from September 2020, but still up significantly over a five-year period. However, the key risk remains higher interest rates as this group of stocks has a high equity duration, meaning that their terminal value is very sensitive to changes in the discount rate.

Source: Saxo Group

Significant changes to the bubble basket

The methodology behind the bubble stocks basket is not changing and thus we are still selecting the 40 largest stocks on market capitalization with the following characteristics:

  1. Market capitalization above $2bn
  2. Listed on exchanges in North America, Western Europe, Singapore, Japan, Australia, and Hong Kong
  3. 12-month forward EV/Sales above 8x
  4. 12-month forward EPS less than 0

Based on a current screening there are 26 stocks out of 40 stocks leaving the bubble stocks basket:

  • Kuaishou Technology
  • Sea Ltd
  • Airbnb Inc
  • NIO Inc
  • Snowflake Inc
  • DoorDash Inc
  • Roku Inc
  • Bilibili Inc
  • Teladoc Health Inc
  • XPeng Inc
  • Cloudflare Inc
  • Splunk Inc
  • Exact Sciences Corp
  • Gaotu Techedu Inc
  • Farfetch Ltd
  • DraftKings Inc
  • GDS Holdings Ltd
  • Ping An Healthcare and Technology Co Ltd
  • Innovent Biologics Inc
  • Zai Lab Ltd
  • Kingsoft Cloud Holdings Ltd
  • Yatsen Holding Ltd
  • Oak Street Health Inc
  • C3.ai Inc
  • Canopy Growth Corp
  • Appian Corp

Many of these companies still have market capitalization above $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.

The 26 new stocks entering the basket are:

  • Rivian Automotive Inc
  • Lucid Group Inc
  • NU Holdings Ltd/Cayman Islands
  • Cellnex Telecom SA
  • Okta Inc
  • SenseTime Group Inc
  • Grab Holdings Ltd
  • Confluent Inc
  • Qualtrics International Inc
  • Brookfield Renewable Corp
  • SentinelOne Inc
  • Robinhood Markets Inc
  • Samsara Inc
  • Gitlab Inc
  • Asana Inc
  • Monday.com Ltd
  • Biohaven Pharmaceutical Holding Co Ltd
  • Procore Technologies Inc
  • Kingdee International Software Group Co Ltd
  • Guidewire Software Inc
  • Ginkgo Bioworks Holdings Inc
  • Smartsheet Inc
  • Novocure Ltd
  • Shanghai Junshi Biosciences Co Ltd
  • Ascendis Pharma A/S
  • Intellia Therapeutics Inc

The table below shows the new updated bubble stocks basket and some key statistics. The bubble stocks basket now represents $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.

NameMkt Cap (USD mn.)12M Fwd EPS12M Fwd EV/SalesDiff to PT (%)5yr return (%)YTD return (%)
Rivian Automotive Inc54,874-4.9714.8118.1NA-41.2
Lucid Group Inc45,160-1.0217.761.6NA-27.9
NU Holdings Ltd/Cayman Islands41,017-0.0214.929.9NA-5.1
Unity Software Inc31,483-0.1319.747.6NA-24.7
Cellnex Telecom SA30,482-0.0810.667.5277.2-23.3
Okta Inc29,623-0.4516.543.5NA-15.0
SenseTime Group Inc29,154-0.0331.57.8NA23.3
MongoDB Inc27,998-0.9023.832.8NA-20.8
Seagen Inc25,598-0.4910.329.5132.7-9.5
Bill.com Holdings Inc24,468-0.4831.932.2NA-5.2
BeiGene Ltd23,748-11.0413.780.2486.6-22.0
Grab Holdings Ltd19,491-0.2517.288.4NA-26.9
Confluent Inc19,079-0.7533.824.6NA-5.4
Affirm Holdings Inc18,336-1.4410.555.9NA-35.1
Alnylam Pharmaceuticals Inc17,658-3.3512.442.3224.0-12.9
Qualtrics International Inc17,5590.0011.733.8NA-13.1
Argenx SE15,084-19.1067.230.41,494.6-19.8
Plug Power Inc12,657-0.249.498.51,761.0-22.2
Brookfield Renewable Corp12,373-0.1713.124.7NA-6.8
Wolfspeed Inc11,849-0.1612.625.4269.4-14.8
SentinelOne Inc11,568-0.6828.248.9NA-14.2
Robinhood Markets Inc11,559-1.079.359.1NA-24.7
Samsara Inc11,031-0.3121.935.1NA-22.1
Gitlab Inc10,773-1.0429.164.1NA-14.5
Asana Inc10,246-0.9819.958.9NA-26.3
10X Genomics Inc10,118-0.2413.6109.8NA-39.2
Avalara Inc9,383-0.1910.268.3NA-16.4
Monday.com Ltd9,141-2.4417.978.1NA-32.9
Biohaven Pharmaceutical Holding Co Ltd8,570-5.169.320.8NA-5.1
Elastic NV8,497-0.458.273.6NA-25.5
Procore Technologies Inc8,358-0.7611.468.5NA-20.8
Kingdee International Software Group Co Ltd8,770-0.049.757.5529.5-18.0
Guidewire Software Inc8,042-0.249.236.176.9-15.0
Ginkgo Bioworks Holdings Inc8,028-0.1521.7118.5NA-35.0
Smartsheet Inc7,952-0.2510.346.7NA-19.0
Novocure Ltd7,818-0.3813.073.5960.60.3
Shanghai Junshi Biosciences Co Ltd7,609-0.8914.961.7NA-19.4
Guardant Health Inc7,353-4.3814.4116.5NA-27.7
Ascendis Pharma A/S7,021-8.0565.053.5423.9-8.2
Intellia Therapeutics Inc6,940-4.10163.069.2617.9-21.1
Aggregate / median686,47014.656.7455.3-19.6
Source: Bloomberg and Saxo Group
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