‘Dash for trash’ fuels big bounce for money-losing growth stocks

No earnings? No problem.

That was the message from investors this week who stormed back into the shares of faster-growing companies with little in the way of profits after months of chasing value stocks. While major benchmarks rallied, a Goldman Sachs index of unprofitable tech companies was up 18% over the five sessions. That compares with a gain of 6.2% for the S&P 500 and 8.4% for the Nasdaq 100.

“A straightforward dash for trash” is how Bespoke Investment Group described it when explaining why smaller companies with the lowest return on assets and no dividends were among this week’s biggest gainers.

Asana Inc., an unprofitable software maker, was among this week’s winners. The San Francisco-based company’s shares jumped 27%. Electric pickup-truck maker Lordstown Motors Corp. gained 30%, while RealReal Inc., which operates a luxury goods consignment marketplace, rose 31%.

Growth stocks with fewer profits have been among the hardest hit this year amid concerns about slowing economic expansion and rising interest rates. Higher borrowing costs make financing more expensive and the value of profits expected to be delivered far in the future less attractive. Asana is down nearly 70% from a November peak, while Lordstown has fallen 19% since the start of January.

In contrast, value stocks with better profitability and stronger balance sheets, such as HP Inc., have outperformed. The Russell 1000 Value Index is down less than 2% this year, compared with an 11% decline for its growth counterpart.

The rally in growth stocks has been aided by the perception that the Federal Reserve, which raised interest rates for the first time in years on Wednesday, will be successful at reining in inflation, according to Kim Forrest, founder and chief investment officer at Bokeh Capital Partners.

“If you believe that these companies are now going to have a longer runway and not have to fight inflation, they have a shot,” she said in an interview. “Everybody loves a good sale.”

Big moves in the shares of smaller companies like the one this week often occur after market lows have been put in, Bespoke said in a research note on Thursday. However, this week’s rally appears to be driven more by mean-reversion and short-covering than anything else, the analysts said, indicating the gains may not last.

That conclusion seemed to be supported by data from Bank of America showing that fund managers are now favoring so-called higher-quality stocks over lower-quality ones for the first time in seven years.

“We view a quality tilt as beneficial amidst peak liquidity, decelerating profits growth and rising volatility, all backdrops in which quality typically outperforms,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, wrote in a research note on Friday.

(Updates share moves throughout.)