Retail investors are giving Wall Street pros a run for their money amid the market’s comeback.
While mom-and-pop investors are typically referred to as the “dumb money,” the stocks amateurs have been snapping up have been outpacing the holdings of hedge funds.
According to a report out this week from Goldman Sachs, the portfolio of stocks popular among retail investors is up 61% since the market bottom on March 23, while the firm’s hedge fund basket is up just 45% in the same time period and the S&P 500 index is up just 36%.
“The narrative of Main Street weakness vs. Wall Street asset inflation is misleading,” said David Kostin, chief U.S. equity strategist at Goldman Sachs. “The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks. Improving virus and activity data pushed investors toward cyclicals, small-caps, and other economically-sensitive, low-multiple stocks.”
Still, many value stocks including financials are trading at extremely low multiples based on 2021 earnings. “Despite the recent value rally, the dispersion of stock multiples is still extremely wide relative to history,” Kostin said.
Goldman said that much of the outperformance by individual investors occurred in the middle of May as the spread of the coronavirus seemed to be slowing and less-bad economic data encouraged bargain hunting.
Signs of optimism from individual investors have been popping up all over the market, which has been drawing some scrutiny in recent weeks. Daily turnover in retail investors’ favorite stocks are jumping, speculative fervor in options has reached what Sundial Capital Research called a “stunning level,” and small investors are even piling into insolvency stocks like the bankrupt Hertz (NYSE: HTZ).
Since the first quarter, brokers like Robinhood, Charles Schwab, and TD Ameritrade saw a flood of new retail investors as the market staged a major rebound from the depths of its March low. Robinhood, for one, saw 3 million new accounts in the first quarter as zero commissions, fractional trading, and a lack of sports due to the coronavirus drove some young investors into the market.
Goldman noted that the companies most popular with amateur traders are sharply outperforming hedge funds and mutual funds since the market bottom, and the stocks they’re snatching up are some of those that have been most impacted by the pandemic, including airlines, casinos, and cruise lines.
The top performers in Goldman’s retail investors basket include Penn National Gaming (NASDAQ: PENN), Moderna (NASDAQ: MRNA), Bank of America (NYSE: BAC), General Motors (NYSE: GM), MGM Resorts (NYSE: MGM), Marathon Oil (NYSE: MRO), Royal Caribbean Cruises (NYSE: RCL), Snap (NYSE: SNAP), and Tesla (NASDAQ: TSLA).
These stocks have seen massive returns. Since the market bottom in March, Penn National Gaming shares are up nearly 325%, Moderna is up 147%, and Tesla share are up 145%.