Alarming Market Sentiment in Uncertain Times

The wave of amateur traders flocking to the stock market during the Coronavirus pandemic has fueled the rise of high-risk retail investment. Newcomers are encouraged by unsustainable stock surges during the pandemic and face the grave danger of continued optimism about grossly-overvalued stocks, many of which pose alarming trend reversal risks beneath the mirage of lasting growth.

         Convenient brokers like Robinhood exploded in popularity during the pandemic. By May of 2020, Robinhood had already amassed 13 million accounts—up 3 million from the end of 2019. These modernized brokerage firms provide simplicity demanded by new investors through user-friendly interfaces that draw the interest of bold younger traders. 

         Many amateur traders have large risk tolerance and faith in growth stocks: shares that people expect to outpace the rest of the market substantially. Many of these growth stocks are overvalued because their fundamental metrics—such as earnings per share (P/E ratio)—are inferior to industry averages. Growth stocks’ valuations rely on potential, determined by a company’s separation from competitors, established partnerships, and possible market size. With low fees and no balance requirements, Robinhood has captured much of the amateur trading community, a demographic that consistently pushes potential-oriented stocks to the top of stock popularity rankings. 

         Tesla—one of Robinhood’s most popular stocks—appreciated over 700% in 2020. Robinhooders and other retail traders, more committed to Tesla and similar volatile stocks than banks, hedge funds, and other professional groups, capitalized from the takeoff of tech stocks in 2020 and outperformed the market.

Nevertheless, as continued optimism among retail (non-institutional) traders about these stocks reach disturbingly-historic highs, it is crucial to avoid further investment in growth stocks.

         Growth stocks’ selling point is their promising futures, but popular growth stocks are now so historically-overpriced that some companies’ evaluations have surpassed their entire market’s value. In other words, a distressing amount of stocks are overvalued, even assuming that the companies manage to control their entire potential market.

         Nikola, just like Tesla, is an electric vehicle company with an overpriced stock. The company has manufactured no products and is still a ways away from doing so. Yet, Nikola’s market cap was worth more than Ford recently because of the exciting idea of hydrogen fuel cell trucks. Nikola’s extortionate market cap suggests guaranteed domination in the truck market. This is improbable because of resistance from traditional truck drivers, the need for new fuel stations, and hydrogen’s outrageous price. Despite its unjustified price, Nikola remains popular amongst retail traders. 

         All historical antecedents prove that such explosive growth of already overvalued stocks is unsustainable. The last time financial ratios indicated growth stocks this overvalued was during the dot com crash in 2000, which marked the momentum shift from booming tech stocks to value investments. 

Given similar circumstances, it is likely that fundamentally sound investments will again end up on top soon. Many of these investments are in traditional sectors like materials and energy—captivated by the glamour of innovative corporations, retail investors underestimate conventional companies’ future roles, leading to the opportunity created by the undervaluation of those stocks. 

Enterprise Products Partners L.P. (EPD), an American midstream energy company, is an example of disgraceful undervaluation. Although business closures during the pandemic have reduced the commercial and industrial usage of oil and natural gas, EPD’s products will remain essential for many years to come. Yet, stock prices shockingly undervalue Enterprise Products Partners L.P, giving it a low P/E ratio of 12.74—Tesla’s is at a ludicrous 1275.19—despite it having a stellar dividend yield (annual shareholder payment divided by share price) of 8.26% in addition to a secure place in the future. Investing in such a stock poses minimal risk due to its intrinsic value; the stock’s value is bound to increase dramatically as growth stocks inevitably correct themselves and market momentum shifts to traditional sectors. 

         The time to pull out of growth stocks is now. The meteoric rise of growth stocks this year suggests an imminent market correction accelerated by post-Covid-19 economic uncertainty. Investing in growth stocks now is equivalent to blowing into an already-colossal balloon to gain a little bit of size before it inevitably pops. It’s not worth it. Instead, all retail investors need to suppress this temptation and opt for sound investments immediately.