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Why retail investors beat the professionals in the recent rally, according to Goldman Sachs

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The market rally has shown the rise of retail—investors, that is.

According to Goldman Sachs, a grouping of stocks favored by retail investors outperformed picks by hedge funds and mutual funds in the rally, as retail investors’ stocks surged 61% since March 23, while hedge fund and mutual fund picks gained 45% (the S&P 500 rose 36% in the same period). That’s made “the narrative of Main Street weakness vs. Wall Street asset inflation … misleading,” strategists at the firm wrote in a note.

Retail investors outperformed in part because they were quick to snap up value stocks as the rally gained traction. While high quality growth stocks outperformed as the market tanked and in the first few weeks of the rebound—benefitting institutional investors who shifted to growth stocks amid the decline—since mid-May, the rally has shifted toward cyclicals, small-caps, and economically-sensitive stocks, Goldman notes. “Stocks with these qualities … were quickly embraced by value-seeking retail investors, and now make up a large portion of our retail basket,” strategists at Goldman write. The firm notes that broker data reveals a “tripling of retail trading activity as the market declined.”

In fact, the Russell 1000 Value Index has outperformed the Growth index, rising over 4% since May 22.

Among the top retail picks in the firm’s compiled portfolio? Hotel and leisure company Penn National Gaming, Inc. (which owns a stake in Barstool Sports) has seen a massive 184% rise since March 23 (as of June 11). Cruise companies like Royal Caribbean and Norwegian Cruise Line Holdings also topped the list, gaining 93% and 78% since late March, respectively. And, of course, trader-favorite Tesla was among the top picks, returning 124% since March 23—also posting an all-time high in the process as the market rebounded and demand for electric vehicles started to recover in China. Other names favored by retail investors include Snap, coronavirus vaccine-hopeful Moderna, MGM Resorts International, and Spirit Airlines.

But not all amateur investors are getting a pat on the back from the Street. In recent weeks, a group of retail investors flooded cash into stocks whose companies had recently filed for bankruptcy, including embattled car rental company Hertz (which was just approved by a U.S. bankruptcy court to sell up to $1 billion equity while in its bankruptcy process). Users of trading platform Robinhood, a commission-free trading app geared toward millennial investors, have come under fire for pumping up the bankrupt stocks.

But the role of retail investors in the rally is hotly debated. Some firms believe that top picks on trading apps like Robinhood actually underperform, from a net-net basis, according to a recent note by Barclays, and aren’t necessarily responsible for the market’s rally. “While it’s true that many high-return stocks have had a substantial increase in retail ownership, low-return stocks have also had a big increase,” Barclays’ Ryan Preclaw wrote.

Regardless of the influence of retail investors on the rally, Goldman notes that the current wide valuation dispersion in stocks “signals long-term
opportunity for value investors.” But “volatile rotations” in recent weeks emphasize “how difficult timing that opportunity can be,” analysts wrote. In that case, the firm believes “most investors should include some value exposure in their portfolios, although the degree will depend on time horizon and risk tolerance, among other factors.”

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