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‘It makes me nervous’: Expert worried about ‘crazy’ market

A worried man chews his fingers, indicating a share price crash or drop on the ASX
Image source: Getty Images

A veteran stock picker is feeling anxious about how the market is behaving, fearing massive losses for retail investors.

Forager Funds chief investment officer Steve Johnson said this week that share markets had “a crazy first quarter”.

“You’re not seeing dramatic moves in the overall index levels, but some of last year’s really big winners have been hammered so far this year.”

He told the Forager video that currently, it wasn’t uncommon to see a share price rocket up 100% then get hammered down 50% within a few weeks.

“This sort of market activity, it does worry me and it makes me nervous.”

An example of the craziness

Forager analyst Chloe Stokes named retailer Stitch Fix Inc (NASDAQ: SFIX) as an example of the vomit-inducing ride some stocks have endured.

“During COVID, the share price was down as low as US$11. And then back in December, it was trading at US$35 before they released earnings for their first quarter.”

The quarterly results were “pretty impressive”, according to Stokes.

“They had good revenue growth and good guidance and a lot of growth in new customers. The stock rose very significantly on the day and continued rising over the next 2 months. It got as high as US$113 at the end of January.”

But from that peak, the stock started tumbling, apparently for no significant reason.

“And there was another significant dip when they released their second quarter earnings, where revenue growth wasn’t quite what the market was expecting, and they lowered their guidance for 2021.”

Stitch Fix shares now trade for US$46.86.

“The stock is now less than half of what it was… We were kind of loosely interested in the stock back before the crazy price rise. And it’s getting to the levels where we might start looking at it again.”

Rollercoaster rides make Johnson sick

According to Johnson, investors should be worried because “there’s a lot of stuff going on under the surface” currently in the market.

“It is not normal for large numbers of stocks to be doubling and then halving,” he said.

“I think you’re seeing a lot of leverage, like these [collapsed] hedge funds that we’ve seen. I think a lot of retail leverage as well, which is a fairly new phenomenon of people being able to buy options and CFDs and things at a retail level.”

Social trading, which really came into public consciousness during the GameStop Corp (NYSW: GME) blow-up in January, is also contributing to the chaos.

“Anyone that’s seen the Wolf of Wall Street knows about the ‘pump and dump’, where you create this excitement about a stock and then sell your stock into it… These new social media platforms like Twitter Inc (NYSE: TWTR) and Reddit have created the ability to do that on a scale that we haven’t seen before,” Johnson said.

“It’s got me quite nervous that these are not isolated incidents. They’re all related to the same thing.”

Buying opportunities

Stokes took the alternative view that the volatility of some stocks has presented investors with golden buying opportunities.

“From my perspective, it’s been great. It’s meant we could buy Farfetch Ltd (NYSE: FTCH) back below US$20 in June last year, we sold it above US$60, and now we’re getting a chance to buy it back again at significantly lower prices.”

Stokes’ team also doubled its money in a few days in January when its Bed Bath & Beyond Inc (NASDAQ: BBBY) holding got indirectly caught up in the GameStop furore.

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Returns as of 15th February 2021

Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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