Stocks have been selling off broadly over the past few days after an unprecedented market rally in recent months. We believe this is a technical factor-driven rotation out of growth and momentum-driven stocks, driven in large part by a spike in Treasury yields (bond interest rates) on inflation fears.
We believe this technical sell-off is fairly overdue and quite healthy given the market's fierce rally over the last few months which has been concentrated in Titan portfolio companies.
We do not advise selling or withdrawing funds on this sell-off. On the contrary, we see better values in our positions as a result, presenting a good opportunity to deploy new funds. We are not selling any of our long positions, and we remain fully hedged as we expected this rotation for quite some time.
Here is a bit more context on what we think is driving this sell-off.
Technical Rotation 101
Titan owns a number of high-growth companies across both the Flagship and Opportunities portfolios that will throw off huge amounts of free cash flow over the next 3-5+ years. However, near-term they're reinvesting most of those cash earnings back into growth, hence low headline earnings.
Since most of their future earnings and cash flow won't come until many years into the future, these companies' cash flows (and hence their stock prices) are especially sensitive to changes in the "discount rate" by which investors value those cash flows. Increases in interest rates / bond yields tend to increase the discount rate that investors use to value a company's cash flows.
As a result, rising interest rates tend to hurt growth-driven stocks much more than value or lower growth / higher near-term cash flowing stocks, in the short term.
The recent spike in inflation fears (partially driven by fiscal stimulus plans related to COVID-19, which many investors think will drive substantial inflation over time) is manifesting in higher bond yields / interest rates, which is driving up the discount rate.
This is driving the growth to value stock rotation in the near term, in our view.
How We're Navigating It
In the near term, the Titan portfolio companies are getting hit relatively hard, and we wouldn't be surprised if this sell-off continues. A 10-15% correction in markets does seem long overdue, though we never claim to be able to predict these. Corrections like these are healthy to clean out the rampant speculation we see in some corners of the market.
However, this technical rotation is not a reason to blow out of high-quality compounding equities. We liked our portfolio companies 10-20% higher, and nothing has changed fundamentally over the past few weeks, so we like the companies even more "on sale" now.
These stocks may keep trending lower near-term, but their balance sheets are strong (many are in a net cash position) and their next 10 years of growth aren't going away, even if investors appraise that growth and cash flow at slightly higher discount rates in the short term.
Sitting through this volatility is ultimately the price we need to pay as long-term investors in order to outperform. Stay the course amidst these huge daily stock price moves and use them to your advantage as a long-term investor.