The best U.S. stocks this month are ones that just a few months ago were the biggest losers.
Netflix Inc., Tesla Motors Inc. (TSLA) and TripAdvisor Inc. have rallied more than 16% in the past four weeks, recouping most of the losses from a rout during March and April. The Nasdaq Composite Index (CCMP) reached a 14-year high this week and the Russell 2000 Index is 2% from a record. Both fell at least 8% earlier in 2014.
The comeback in technology and small-caps shows appetite for risk is returning as investors overcome concern about the economy and stock valuations. The Standard & Poor's 500 Index has risen in four of the past five weeks and is up 1.2% since June 13, reaching a record.
“We're seeing a lot of market appreciation coming from the flow back into risk assets,” Brad McMillan, the chief investment officer for Commonwealth Financial Network, said. The firm oversees about $83 billion. “That's pure risk-on behavior. We saw that reverse as people got scared and we're seeing it re-reverse as people get more confident.”
A contraction in economic growth during the first quarter and concern stocks are too expensive fueled a selloff during March and April. Biotechnology, small-caps and Internet shares were the hardest hit and the S&P 500 fell as much as 4% in April.
The S&P 500 has climbed for six straight days as analysts raised profit forecasts and the economy showed signs of recovering from winter. Stocks rose as Federal Reserve Chair Janet Yellen said accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth.
The S&P 500 advanced 0.2% Friday to a record 1962.87.
“Yellen yesterday confirming that the Fed is in no hurry to change the status quo — it's a reminder that there's no place for money to go,” Keith Goddard, president of Capital Advisors Inc. in Tulsa, Okla., said. His firm manages $1.4 billion. “There is no place to go but to try and eke out a return in riskier markets.”
Earnings for S&P 500 companies will probably increase 7.5% this year, up from an estimate of 7.2% at the beginning of May, according to projections compiled by Bloomberg.
Netflix has gained 21% in the past month, the second-biggest advance in the Nasdaq 100 Index. The Los Gatos, Calif.-based company said last month that it will introduce its online video service in Germany, France and four other European countries.
Tesla, the electric-car company owned by billionaire Elon Musk, has soared 16% since May 19. Earnings for the Palo Alto, Calif.-based company are forecast to increase 46% this year, according to the average analyst estimate from a Bloomberg survey.
TripAdvisor, based in Newton, Mass., has climbed 19% during the past month. The online travel research company last month raised its forecast for revenue growth.
All three had losses exceeding 23% during March and April. For some companies, a recovery is still far away. Indexes of biotechnology and Internet firms listed on the Nasdaq Stock Market are still at least 9% away from their 2014 peaks and Twitter Inc. is down 39% this year.
“We're at the high end of fair value in this market,” Todd Lowenstein, a fund manager who helps manage $15 billion at Highmark Capital Management Inc. in Los Angeles, said. “I keep expecting this environment to change or be altered, but it's extended a lot further and longer than anybody has ever imagined. Sometimes, the biggest risk is when people are unafraid.”
Valuations in the S&P 500 have expanded to 17.9 times current earnings, the highest level since 2010, data compiled by Bloomberg show. The Nasdaq Composite trades at 34.5 times profit, up from 12.7 in 2012.
Investors have reduced hedges on technology stocks amid a renewed confidence in equities. The cost of purchasing three-month options on the Powershares QQQ Trust exchange-traded fund has dropped to the lowest in at least 10 years. About 111,000 bearish wagers on the fund changed hands June 17, the lowest daily put trading volume since December.
“Investors are enjoying the market trend that we've seen,” Jonathan Corpina, senior managing partner at Meridian Equity Partners who works on the floor of the New York Stock Exchange, said. “We've moved higher and then a step back every once in a while, but nothing has really derailed this market.”