The last six months have been a frustrating time for growth investors. Particularly those investors focused on emerging secular themes- new biotech developments, mRNA technologies, gene editing/therapies, gene sequencing, block chain technologies, AI (artificial intelligence), cloud infrastructure, the shift to EV/autonomous driving, and the like. Not only have the securities of these firms lagged the overall market, but ironically, did so in the face of accelerating business fundamentals. What explains the apathy toward these stocks?
A host of factors have contributed to the malaise. First, a number of these companies were very significant beneficiaries of the stay-at-home trade, and as a result, may have pulled in some business during the pandemic. Moreover, the scarcity value of growth during this period pushed valuations up to extraordinary levels. Second, economies around the world began to open up, leading investors to find growth opportunities at more reasonable valuations, the so called re-opening trade. Third, dislocations in the supply chain have led to shortages across a number of industries, including semiconductors, leading to limited upside in these industries and associated customer bases. Furthermore, these commodity shortages are leading to price increases stoking inflation fears. These fears, in turn, tend to compress multiples because the values of future discounted future cash flows diminish.
Yet these headwinds may be about to reverse. With valuations more reasonable and fundamentals continuing to look very promising there is ample reason for optimism. We expect a number of follow-on announcements in the healthcare arena that could spur renewed investor enthusiasm. Who doesn’t believe that todays applications need to be rebuilt using new technologies, like block chain, to alleviate the security breaches that have become all too common? Adding AI to capabilities will offer added insights, more capability, and ease -of-use wherever implemented. The migration away from fossil fuels will promote new opportunities- EV/autonomous driving. Work-from-home will morph into work-from-anywhere further promoting cloud infrastructure. And again, these trends are actually accelerating.
Hangar 4 Partners LLC is dedicated to finding and investing in these trends, notwithstanding periods of investor apathy and uncertainty.