Small-Cap Growth Stocks Have Stumbled. Now, They’re Getting Ready to Run Again.
Feb 27, 2022
The last three months have been a struggle for small-cap growth stocks. They're now embarking on what may be a lengthier journey.
The iShares Russell 2000 Growth Exchange-Traded Fund (IWO) is regaining strength following a 24% loss from its nine-month high of $327 in early November.
The primary cause of the decline was the Federal Reserve's decision to begin a policy reversal in March. For months, the central bank has indicated that it intends to raise interest rates numerous times and cut its bond holdings in order to contain inflation.
The anticipated adjustments decrease the price of long-dated bond yields, hence increasing their revenue. Increased long-dated bond rates devalue future revenues, a roadblock for many high-growth businesses that anticipate the majority of their profits coming years from now.
As a result, the aggregate forward earnings multiple for the growth fund's holdings has declined to around 35 times from 51 times in early November.
The dip includes brands associated with digital payments and subscription-based corporate software. Three examples: Shift4 Payments (FOUR), with a market capitalization of $4.2 billion, is down 31%; Jamf Holdings (JAMF), a $3.9 billion provider of software management services to businesses that use Apple products, is down 33%; and SailPoint Technologies (SAIL), a $3.7 billion provider of employee-identity management software to businesses, is down 34%.
At the moment, though, the stocks are off to a strong start and are gaining momentum. Shift4 Payments, Jamf, and SailPoint, are all up 18%, 10%, and 9% from their Thursday lows, respectively. As was the case with many other names, they were caught up in the larger market selloff precipitated by Russia's invasion of Ukraine.
And they are boosting the Russell ETF, which has up 8% this year. Just before the market staged a late afternoon comeback, the growth fund plummeted below $232 a share, roughly where it had bottomed twice earlier this year.
A portion of the stimulus for fintech stocks is, well, technical in nature.
"This group is significantly oversold," Wells Fargo's head of equities strategy, Chris Harvey, said, touting the group as one of the market's most promising.
However, the foundations are also at stake. According to 22VResearch data, markets appear to have decided on six rate rises over the next couple of years, down from seven in late February.
Perhaps unsurprisingly, the fewer hikes have resulted in a reduction in the yield on the 10-year Treasury note. At 1.99 percent, the government bond is unable to break through the 2% level it has reached many times in the last month.
As a result, if bond rates can continue to climb more slowly, profits and sales growth for small-cap growth businesses have the potential to boost stock values. And the growth prognosis appears to be rather favorable. According to FactSet, the growth fund's aggregate profits per share are predicted to increase by little more than 45 percent in 2023.
Therefore, investors, while these equities have faltered, they are regaining their footing. It's not a terrible moment to acquire them, even if the market remains bumpy for the foreseeable future.