Theme basket review: Cleanup in bubble stocks amid historic plunge
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.
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:
- Market capitalization above $2bn
- Listed on exchanges in North America, Western Europe, Singapore, Japan, Australia, and Hong Kong
- 12-month forward EV/Sales above 8x
- 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.
|Name||Mkt Cap (USD mn.)||12M Fwd EPS||12M Fwd EV/Sales||Diff to PT (%)||5yr return (%)||YTD return (%)|
|Rivian Automotive Inc||54,874||-4.97||14.8||118.1||NA||-41.2|
|Lucid Group Inc||45,160||-1.02||17.7||61.6||NA||-27.9|
|NU Holdings Ltd/Cayman Islands||41,017||-0.02||14.9||29.9||NA||-5.1|
|Unity Software Inc||31,483||-0.13||19.7||47.6||NA||-24.7|
|Cellnex Telecom SA||30,482||-0.08||10.6||67.5||277.2||-23.3|
|SenseTime Group Inc||29,154||-0.03||31.5||7.8||NA||23.3|
|Bill.com Holdings Inc||24,468||-0.48||31.9||32.2||NA||-5.2|
|Grab Holdings Ltd||19,491||-0.25||17.2||88.4||NA||-26.9|
|Affirm Holdings Inc||18,336||-1.44||10.5||55.9||NA||-35.1|
|Alnylam Pharmaceuticals Inc||17,658||-3.35||12.4||42.3||224.0||-12.9|
|Qualtrics International Inc||17,559||0.00||11.7||33.8||NA||-13.1|
|Plug Power Inc||12,657||-0.24||9.4||98.5||1,761.0||-22.2|
|Brookfield Renewable Corp||12,373||-0.17||13.1||24.7||NA||-6.8|
|Robinhood Markets Inc||11,559||-1.07||9.3||59.1||NA||-24.7|
|10X Genomics Inc||10,118||-0.24||13.6||109.8||NA||-39.2|
|Biohaven Pharmaceutical Holding Co Ltd||8,570||-5.16||9.3||20.8||NA||-5.1|
|Procore Technologies Inc||8,358||-0.76||11.4||68.5||NA||-20.8|
|Kingdee International Software Group Co Ltd||8,770||-0.04||9.7||57.5||529.5||-18.0|
|Guidewire Software Inc||8,042||-0.24||9.2||36.1||76.9||-15.0|
|Ginkgo Bioworks Holdings Inc||8,028||-0.15||21.7||118.5||NA||-35.0|
|Shanghai Junshi Biosciences Co Ltd||7,609||-0.89||14.9||61.7||NA||-19.4|
|Guardant Health Inc||7,353||-4.38||14.4||116.5||NA||-27.7|
|Ascendis Pharma A/S||7,021||-8.05||65.0||53.5||423.9||-8.2|
|Intellia Therapeutics Inc||6,940||-4.10||163.0||69.2||617.9||-21.1|
|Aggregate / median||686,470||14.6||56.7||455.3||-19.6|
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.