April 9, 2014, 4:39 p.m. EDT
NEW YORK (MarketWatch) — Biotech and Internet stocks rebounded nicely on Wednesday, but the preceding sharp slide that started in so-called momentum stocks has investors wondering whether a shift in leadership from growth to value is underway.
Some stock pickers, however, warn against throwing growth-oriented shares overboard altogether, arguing that the rout has created some bargains.
“It feels like the market has been very indiscriminate in terms of selling off things within tech and the biotech sector,” said Jeff Morris, head of U.S. equities at Standard Life Investments in Boston, which has $305 billion in assets under management.
While it’s difficult to say whether the rotation is complete, it may offer an opportunity for “bottom-up, fundamental analysts” to step in and look for some relative-value opportunities, he said, in a phone interview.
Growth stocks are companies that investors expect to deliver faster-than-average growth in revenue, earnings or cash flow. Value stocks are those issued by companies which investors believe are undervalued for a variety of reasons.
The slide was led by biotech stocks and at first looked like normal sector rotation, said Adam Sarhan, chief executive of Sarhan Capital. The rout soon turned more extreme, with panic soon spreading across growth-oriented tech stocks.
Soon, the extreme selling pressure took some highflying names —social network Facebook Inc.(NASDAQ:FB) , electric-car maker Tesla Motors Inc. (NASDAQ:TSLA) — down by 20% or more from their recent highs by Friday, meeting the definition of a bear market for those shares. They’ve since recovered some lost ground, with Facebook jumping more than 7% in Wednesday’s session. Netflix, Inc. (NASDAQ:NFLX) however, is still down more than 20% from a March high.
The Nasdaq Composite (NASDAQ:COMP) is down 0.4% for the month to date, versus a virtually flat S&P 500 (SNC:SPX) and a 0.1% for the Dow Jones Industrial Average (DJI:DJIA) . The formerly high-flying iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) bounced 4.1% higher on Wednesday, trimming its month-to-date loss to 0.6%.
At the same time, energy stocks, which lagged the broad market in the first quarter, are up 0.5% this month, the third-best of the S&P 500’s 10 sectors behind utilities and telecommunication services.
Some value investors, such as Mark Mobius of Franklin Templeton’s Templeton Emerging Markets Group, have been buying beaten-down stocks, such as emerging market technology companies. In an interview with Bloomberg News earlier this week, he cited a 20% drop in Hong Kong’s Tencent Holdings Ltd. (HKG:HK:0700) as a reason for his interest.
Russ Koesterich, chief investment officer at BlackRock, said in a note this week that a shift away from some growth segments shouldn’t be a surprise since valuations for some industries in the sector, particularly biotech and social media, were starting to look “stretched” and investors were starting to look for better opportunities elsewhere.
“This shift actually seems appropriate to us, as there are more attractively priced segments of the market that warrant investor attention. In particular, we would emphasize U.S. mega-cap companies, especially in the energy sector and non-Internet technology industries,” Koesterich said, in a note.
Blackrock also argues that many international markets offer better value then can be found in U.S. stocks. The firm continues to like European and Japanese stocks among developed markets, Koesterich said.
Standard Life’s Morris said it may be difficult to determine where support would come from for some biotech and Internet-oriented names that were hammered in the recent rout. Nevertheless, some companies, particularly in biotech, probably will see earnings growth in the near term, though it’s hard to say when the market will make that shift.
With the economy improving at a measured pace, “at some point there should be a reward for companies that are able to show that they can grow and aren’t just sort of a cyclical-leveraged story … to just discard the growth names without having a major macro shock feels a little bit harsh,” he said.