The top stocks traded by investors on the popular commission-free trading platform Robinhood are outperforming those favoured by hedge funds and mutual funds since the stock market bottom on March 23, according to a new note published by Goldman Sachs Group Inc.

Using data collected from discount online brokerage Robinhood and Robintrack, Goldman’s chief U.S. equity strategist David Kostin accumulated a list of the most popular stocks traded on the platform. According to Kostin, a basket of stocks including airline, cruise line, big tech, U.S. banks and gaming companies is up 61 per cent as of June 11. A portfolio made up entirely of these stocks blows away the 45 per cent returns for similar lists the bank has comprised of favourite hedge fund and mutual fund holdings. The S&P 500, meanwhile, is up 36 per cent as of Monday.

“In recent weeks, investors have focused on a different type of disconnect between Wall Street and Main Street: The relative performance of institutional and retail investors,” Kostin wrote. “The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks.”

Institutional investors initially had the upper hand: From the market trough to the middle of May, growth stocks, led by the ever-expanding technology sector, widely outperformed value. That environment was quite positive for institutional investors, Kostin said, because they had heavily tilted their portfolios toward growth during the decline — a classic, well-tested strategy.

But a rotation occurred as positive data about the slowing spread of COVID-19 was released and retail investors sought out low-multiple stocks, small caps and cyclicals to bet on a quick economic recovery from the pandemic.

The list compiled by Kostin shows just where that retail money was spent. Penn National Gaming Inc., a casino and racetrack operator, tops the list with a 184 per cent return since March 23. Moderna Inc. and Tesla Inc. have each also returned more than 120 per cent, while Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. are nearing a 100 per cent return.

The report contradicts a recent one published by Barclays, which argued that the favourite picks of Robinhood investors are actually underperforming.

With the exception of the FAANG stocks, the list of the favourite stocks traded on Robinhood is made up of companies in economically sensitive sectors and those that were brutally beaten down in the bear market. Some analysts have pointed the finger at the retail investors who are collectively pumping millions into these stocks and suggested that they are the ones who are responsible for leading the market higher, and perhaps too high.

Hundreds of thousands of new retail investors are trading stocks for the first time Robinhood, leading to a high degree of volatility being associated to value stocks. Single-day double digit moves in either direction are common for many of these names and have provided enough cause for investors to avoid them. But Kostin said most portfolios should incorporate some value.

“We believe most investors should include some value exposure in their portfolios, although the degree will depend on time horizon and risk tolerance, among other factors,” Kostin said. “In the medium term, the challenge is determining which laggards are value opportunities and which leaders will experience fundamental growth that justifies current elevated valuations.”

Although energy remains the largest year-to-date laggard with a -36 per cent return, Kostin recommends looking at it another way. The group has had the largest consensus cut to 2021 earnings-per-share estimates and Goldman commodity strategists are soon expecting a 15 to 20 per cent correction in crude prices.

Financial stocks have the lowest valuation compared with their 2021 EPS estimates, but still face significant headwinds in the form of low interest rates. Utilities, on the other hand, stand to benefit from low interest rates and may be appealing to investors looking for some defence, Kostin said.

Financial Post

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