Defensive bubble stocks = umbrellas in a hurricane

High quality bubble assets are still bubble assets

In October, we published analysis demonstrating why it’s never too early to sell a bubble. Unsurprisingly, investors have remained reluctant to reduce their bubble exposure, owing to a fear of missing out. Instead, some have advocated reducing bubble exposure by moving up in bubble quality, i.e. avoiding Tech stocks with the most stretched valuations and growth expectations and sticking to established industry leaders with strong cash flows or companies with strong secular tailwinds. Many investors tried to take a similar approach during the late-90s, but unfortunately, with little success.

Strategy 1: Buy proven leaders. During the Tech Bubble, the largest stocks in the Tech sector were widely considered established winners with solid fundamentals, such as Microsoft, Cisco and Intel. Not only did the stocks of the ten largest “proven leaders” crash by an average of 84% during the bear market, half of them never recovered their peak, while those that did took an average of 15 years to do so. See Table 1 on page 2.

Strategy 2: Buy tomorrow’s winners. What if investors were able to predict the future winners? Of today’s ten largest Tech stocks, also including Communication Services and Amazon, those that were publicly traded at the peak of the Tech Bubble fell by an average of 72% during the bear market and took over 11 years to recover their peak. See Table 2 on page 2.

When a bubble crashes, every part of it goes down

Of the 63 stocks within the Tech sector at the peak of the stock market, only four (6%) were able to outperform the S&P 500® during the market crash (by far the lowest of any sector). What investors may find most surprising is that none of the four outperformers were established leaders or future winners. In fact, they were generally higher beta and smaller cap Tech stocks that are all but forgotten today. See Table 3 on page 2 for this list.