Stock market just issued a warning on household stocks

Tuesday was a good day for the stock market, with investors hoping the near future could bring a much bigger stimulus package that would help support the US economy. Earnings for the Dow Jones Industrial Average (DJ INDICES: ^ DJI) were relatively small, but clearer gains S&P 500 (SNPINDEX: ^ GSPC) and Nasdaq composite (NASDAQINDEX: ^ IXIC) reflected a widespread bullish trend in the market.

Data Source: Yahoo! Finance.

Momentum-driven investing strategies have performed extremely well over the past nine months, and companies that have been able to deliver much-needed products and services to those who have to stay home due to the COVID pandemic -19 were among the best performers. However, a few large focus growth stocks were down on Tuesday, missing the rally and raising questions about whether a larger market rotation could be imminent.

Fair warning

The warning shot came from UBS analysts, who were looking at certain stocks that have benefited the most from the “stay-at-home” movement. UBS ended up demoting three stocks from neutral to sell, including Interactive Platoon (NASDAQ: PTON), Fiverr International (NYSE: FVRR), and Soft (NYSE: WHO).

Investor responses were very different. Chewy’s shares fell only 1%. Peloton, however, fell 5%, and Fiverr took the biggest hit with a 10% drop.

Interestingly, however, the comment that accompanied the downgrades was not entirely negative. In the case of Peloton, for example, UBS still believes that the pioneer of connected home fitness equipment is in a position to gain market share in classic gyms and fitness centers even as the pandemic is under control. Brand loyalty is strong and Peloton has taken steps to increase its manufacturing capacity. However, even though it increased its price target on Peloton from $ 9 to $ 124 per share, UBS believes the current price is simply greater than the potential rewards.

Likewise, Fiverr has tapped into the growing demand for work in the odd-job economy in the United States and around the world, and it has yet to grow, according to UBS. This justified a substantial $ 42 increase in the target price to $ 190 per share. But with the share price far above that, it’s unlikely that Fiverr will grow fast enough to justify extremely high valuations right now.

Finally, Chewy has leveraged the online pet food and product category very well, and there is potential for expansion. However, it will be difficult for the retailer to outperform their 2020 sales performance, which will make comps difficult and could potentially chill the stock. UBS kept its price target of $ 75 per share unchanged.

Will growth investing stop working?

First and foremost, investors need to understand that there is nothing very special about today’s calls against some of the biggest momentum stocks from 2020. Investors often end up seeing a one day impact on such the stock to start rising again.

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

Presumably, if the stock price were to fall, it would cause analysts to go back and re-price stocks. Then the share price would go up, and there’s a good chance that investors got screwed and need to buy back at a higher price. With that in mind, you might get a better result just by holding on to stocks if you think they’re still ripe for long-term growth.