The stock market’s unlimited potential can, at times, create energy and enthusiasm as investors embrace hope, looking to find the next ‘big one’ and jump on it at the right time. It’s no surprise that when the market has been on a big run, and when a new trend arrives with an optimistic outlook, everyone wants in, either lured by the promise of success or simply the thrill of the chase.
Over the past few years, several of these categorically trend stocks have arisen, each with expectations to deliver exactly that. Many investors have bought in on hopeful judgement, glancing analysis, and the big picture trend. When we see this type of market behavior, it makes us wary.
Investing should involve discipline and rigor, with decisions based on deep analysis into individual companies, their fundamentals, and their fit alongside your total portfolio. In other words, we go beyond looking at only upside potential to anticipate the long-term risk as well, and good thing we do. A whole host of stocks swept up in excess hope, have seen their hype roll over and then some in this year’s sharp market selloff.
Today, we’re sharing insights into what happened and why, our decision-making process, and what you can expect from us when the next trend starts making headlines.
When we like a company, but not its stock
Craze stocks are almost always tied to emerging trends and offer a new product or unique solution to a problem. Often, these companies are doing everything right, generating enough buildup around the good or service, driving popularity with consumers. But the catch for investors is to differentiate between liking a company and liking the stock.
Take at-home gyms, for example. This pandemic darling trend delivered a compelling pandemic-era workout solution as quarantined gym-goers desperately looked for substitutes to maintain their fitness routine. Think Nike, Adidas, Mirror, and of course, Peloton. The superstar of the pandemic era, Peloton, saw huge gains over the past two years as early adopters bought the cycle machine, as well as the required online subscription. The product-market fit was perfect, and the stock (and its valuation) soared.
While our research analysts found Peloton—the company—interesting, analysis determined that the tailwinds received during lockdowns were simply unsustainable. A year after its height, that view is proving true as the company appears to now be grappling with a substantial demand slowdown. As the stocks related to this trend pull back, we’ll continue to evaluate both fundamentals and valuations, which are now much more favorable, to determine if conditions are becoming more conducive to an investment.
Going beyond the trend
The key to our approach is a thorough evaluation of the nuances of the business. In other words, and for high growth trend stocks: What’s causing the success and is it sustainable?
Another pandemic darling, streaming services, encapsulates this level of analysis. In-home entertainment was heavily sought-after during the lockdowns, resulting in a demand surge for streaming services. The streaming era has been growing for many years as consumers look to cut cords and save money. In response, media companies have been racing against the clock to launch new services and grab market share as soon as possible, looking to tip the scale against each other and secure as many viewers as possible.
The nuance here is layered. Streaming has low barriers to entry, resulting in a wide mix of newly launched services. However, streaming also has very high barriers to scale, leading us to believe that there will only be a handful of winners over the long-run. Current companies such as Disney and Netflix are performing well as streaming begins to enter its second phase of slower growth and lower hype.
During this phase, we believe more budget allocation will directed toward first-run content as companies look to meet consumers where they are and keep them with engaging content. This may include delivering more than a streaming service. For example, Disney has its infamous suite of brands and products, and Netflix has evolved into broader content creation. Looking beyond the trend allows the true colors of the business plan and investment potential (or lack thereof) to be discovered.
Analysis over hyped up headlines
Determining the sweet spot to buy is the ultimate question. Yet, timing the market is less important than time in the market. Do you want to be the tortoise or the hare?
Lastly, we believe it’s necessary to consider not only the company, but the market itself. There is a time and place for risk, but given the current state of the financial markets and the economy, now is not the time. For trendy stocks, the combination of high valuations and the element of the unknown, paired with where we are in the market cycle, creates a level of risk that we believe is a deterrent.
Today, we believe the adage of ‘winning by not losing’ holds true. The foundation of our investment process is around discipline, not hyped-up headlines, helping provide a degree of protection against impulse buys. It’s that thought process that differentiates our long-term portfolios. Stick to your plan, and don’t let headlines and over promises deter you from your goals.
Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, then subscribe to our insights.
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.
