By Beth Kindig
Gains in some technology stocks this year have been nearly wiped out by what has been called a “value rotation.”
The narrative in much of investing media is that investors are concerned about earnings. But I believe it was a strategic move by some large investors to time the top of the stock market and pocket gains.
The rotation, which began in September and continued in October, was under-reported because investors dumped stocks directly after earnings reports were released. This made it appear as though the declines were due to an individual stock’s fundamentals. In reality, there were share-price decreases across the board, even as many companies reported earnings “beats.”
The term “value rotation” doesn’t accurately describe what occurred in early September. The proof is in the comparison between value /zigman2/quotes/206097129/composite IVE +0.16% and so-called momentum /zigman2/quotes/201303785/composite MTUM +0.58% indexes. Value hasn’t outperformed momentum.
Instead of a value rotation, the market is going through a cash rotation. As IVE and MTUM battle it out, cash positions are increasing. As reported by MarketWatch in October, research firm DataTrek said there was $3.4 trillion in U.S. money market funds last month, 14% higher than at the end of 2018.
As we see below, institutional selling of individual stocks has been much more severe over the past month than during last year’s fourth-quarter selloff. This matches the information from DataTrek.
A storyline is that growth is overvalued, with many software as a service (SaaS) stocks trading at 20 times sales with zero profits. Another is that the market is worried about soft IT spending . Third, there are concerns of weak growth. However, recent earnings prove that for some companies, growth and cloud spending are actually accelerating.
Alteryx /zigman2/quotes/202651591/composite AYX +0.05% is a great example. The company beat analysts’ estimates on all measures, including revenue, profit and earnings per share (EPS) in the most recent quarter, yet the share price has dropped 35% in three months. Revenue jumped 65% to $103 million, with international business rising 43% to more than $28 million. Doing business overseas is always an important leap for U.S. software companies. Alteryx raised its full-year revenue outlook to $389 million-$392 million, up from $370 million-$375 million. Non-GAAP income from operations and non-GAAP EPS full-year guidance were also raised.
In the chart above, the large volume spikes coupled with noticeable price movements suggests institutional positioning. We see that selloff volume (red spikes) is much higher over the past two months than during the fourth-quarter selloff.
Alteryx’s shares were down in the days after the strong earnings report.
Roku’s /zigman2/quotes/205087179/composite ROKU -0.53% stock also fell, even though the company beat estimates for every single number. Revenue of $260.9 million was above the Wall Street consensus of $257 million. Platform revenue surged 79%, while ad revenue more than doubled. Roku had an adjusted loss of 22 cents a share, better than the 28-cent loss expected by analysts. Still, the stock plunged 16%. While the shares have recovered, there was steep institutional selling going into the earnings that was similar to what happened to Alteryx.