NEW YORK, N.Y. – Wall Street’s cool kids have been booted from the lunchroom.
Technology and biotechnology companies, high-flying stocks over the last two years, have been beaten down the last three weeks. Many are now in bear territory, which is when a stock falls more than 20 per cent from a recent high.
Twitter is down 35 per cent since early March and Amazon.com has slid 19 per cent. Biotechnology companies have been hit just as hard. Gilead Sciences is down 16 per cent and Vertex Pharmaceuticals has fallen 23 per cent.
Their sudden downfall comes as investors shift from riskier investments to safer areas like utilities, health care and consumer staples, say fund managers and market watchers. The sell-off in these former darlings, whose stock prices appealed to investors because their rise seemed unstoppable, has weighed on the overall market, especially the tech-heavy Nasdaq.
The Nasdaq is down 2.1 per cent this month, on top of a 2.5 per cent fall in March. The Dow Jones industrial average and Standard & Poor’s 500 index fell less than half that amount last month.
A confluence of factors appears to have hurt biotech and tech stocks, market strategists say.
Investors have spent most of this year shifting away from riskier investments. The money pulled out of biotech and tech has gone into safer, dividend-paying stocks, like health care, consumer staple and utility companies. Investors typically buy utilities when they are concerned about volatility. Those companies pay big dividends, and demand for the power they generate tends to be stable, regardless of how the economy is doing.
While tech stock saw some gains Tuesday, utilities stocks rose sharply.
Other conservative investments have fared well. Bonds have outperformed the overall stock market in the first three months of 2014. And gold, which dropped 28 per cent last year, is up 9 per cent so far in 2014.
Investors have sought more security after last year’s blockbuster stock-market performance, which saw the S&P 500 rise 30 per cent and hit multiple record highs. There are growing worries about earnings. With earnings season arriving this month, investors want to play it safe, and tech and biotech stocks have no place at the table when the market is playing defence.
“There’s clearly a rotation going on in the overall market away from these riskier stocks,” says Neill Groom, a portfolio manager at Neuberger Berman.
Tech and biotech stocks are often among the most risky investments an investor can make in the broader stock market. They tend to rise more than the rest of the market and fall more, too. That’s because they offer the possibility of higher growth, but also pose a greater risk of stumbling.
“I would not be surprised to see more selling in them because these companies often trade on momentum,” says Andres Garcia-Amaya, a global equity strategist with J.P. Morgan Funds, adding that “right now the momentum is down.”
Risky stocks have all been hurt by low expectations for corporate profits in the first quarter. It’s expected that S&P 500 companies earned 1.2 per cent less compared with the same period a year earlier. Also, 93 out of S&P 500’s members have cut their first-quarter earnings outlook.
Lower profitability tends to hit riskier stocks harder because investors are less confident in a risky company’s business.
“Expectations (at the beginning of the year) might have been a bit ahead of themselves,” Garcia-Amaya says. “When a stock is trading at 40 to 50 times earnings, you don’t need to find many reasons to bring that stock back down to earth.”
For some wary investors, the recent tech drop may conjure bad memories of the 2000 dotcom bubble bursting. But money managers are quick to point out that even the more speculative technology stocks are nowhere as risky as the ones from 1999 and 2000.
When the dotcom bubble was at its frothiest back then, the Nasdaq traded at a price-earnings ratio of 194-to-1, meaning investors were paying $194 for every dollar of earnings the companies in the index brought in. The Nasdaq’s P/E is now around 24-to-1.
Netflix, Amazon, Priceline.com and others have real business models with sales and profits. Twitter, while it hasn’t made a profit, generates revenue from advertising and is expected to earn a modest profit this year, according to analysts. That’s completely different from the metrics used by speculators in 2000 when dotcom companies were valued by dubious measurements such as “cash burn rates” and “eyeballs.”
Groom says the sell-off has made several tech and biotech stocks more attractive than they once were, and says he might buy some individual names “opportunistically.” But he’s waiting.
“We don’t know how long this bloodletting will go on,” he says.