Cleanup in bubble stocks amid historic plunge

By Peter Garnry, Head of Equity Strategy at Saxo Bank

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 bubble stocks (speculative growth stocks) to be shredded en masse while commodity and value related stocks were increased in portfolios.

Saxo Bank’s bubble stocks basket, which was introduced on 8 January 2021, 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. Based on a current screening there are 26 stocks out of 40 stocks leaving the bubble stocks basket. 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. 26 new stocks are entering the basket.

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.

Source : Bloomberg and Saxo Group

Further reading : Theme basket review: Cleanup in bubble stocks amid historic plunge

Peter Garnry

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