The Stock Market Just Fired a Warning Shot at Stay-at-Home Stocks

Tuesday was a strong day for the stock market, with investors hoping that the near future could bring a much larger stimulus package that would help bolster the U.S. economy. Gains for the Dow Jones Industrial Average (DJINDICES: ^DJI) were relatively modest, but sharper gains for the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) reflected widespread bullishness across the market.

© Provided by The Motley Fool
The Stock Market Just Fired a Warning Shot at Stay-at-Home Stocks

Index	Percentage Change	Point Change
Dow	+0.38%	+116
S&P 500	+0.81%	+31
Nasdaq Composite	+1.53%	+199

Data source: Yahoo! Finance.

Momentum-driven investing strategies have done extremely well over the past nine months, and companies that have been able to deliver much-needed products and services for those needing to stay at home due to the COVID-19 pandemic have been among the top performers. However, a few prominent stay-at-home growth stocks  were down on Tuesday, missing out on the rally and raising the question of whether a broader rotation in the market might be imminent.

Fair warning

The warning shot came from analysts at UBS, who were looking at some stocks that have benefited the most from the stay-at-home movement. UBS ended up downgrading three stocks from neutral to sell, including Peloton Interactive (NASDAQ: PTON), Fiverr International (NYSE: FVRR), and Chewy (NYSE: CHWY).

The responses from investors were very different. Shares of Chewy fell just 1%. Peloton, however, sank 5%, and Fiverr took the biggest hit with a 10% decline.

Interestingly, though, the commentary that accompanied the downgrades wasn’t entirely negative. In the case of Peloton, for instance, UBS still believes the at-home, connected-fitness equipment pioneer stands to win market share from regular gyms and fitness centers even as the pandemic comes under control. Brand loyalty is strong, and Peloton has taken steps to boost manufacturing capacity. However, even as it boosted its price target on Peloton by $9 to $124 per share, UBS believes that the current price is simply higher than the potential rewards.

Similarly, Fiverr has tapped into the rising demand for gig economy work both in the U.S. and worldwide, and it still has further to grow in UBS’s view. That warranted a substantial $42 increase in the price target to $190 per share. But with the stock price far above that, Fiverr is unlikely to grow fast enough to justify extremely high valuations currently.

Finally, Chewy has tapped into the online pet food and products category very well, and there’s some potential for expansion. However, it’ll be hard for the retailer to outdo its 2020 sales performance, making comps tough and potentially cooling off the stock. UBS kept its $75 per-share price target unchanged.

Will growth investing stop working?

First and foremost, investors should understand that there’s nothing all that special about today’s calls against some of the stocks with the greatest momentum from 2020. Investors often end up seeing a one-day impact from calls like these only to have momentum reassert itself and for the stock to start rising again.

In the end, the easiest thing for long-term investors to do is to assess whether they believe anything has fundamentally changed with the companies whose shares they own. Even UBS seems to acknowledge that Fiverr, Chewy, and Peloton have solid growth prospects.

Presumably, if the share prices were to fall, it would lead the analysts to go back and upgrade the stocks. Then, the stock price would jump, and the odds are good that investors will have gotten whipsawed and have to buy back in at a higher price. With that in mind, you could get a better result just by holding onto the stocks if you think they’re still poised for long-term growth.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fiverr International and Peloton Interactive. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

SPONSORED:

10 stocks we like better than Peloton Interactive

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Peloton Interactive wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of November 20, 2020