Run on Momentum Stocks Is Punishing a Surprising Group

By Akane Otani 

September has turned the strongest trades of the year on their heads, sparking a rare period of underperformance among many big technology stocks. But the shares that have taken the biggest hits aren't the usual suspects.

Shares of Visa Inc., Mastercard Inc. and PayPal Holdings Inc. are each down at least 3% for the month, even as some of the popular FAANG stocks -- Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. -- are headed toward monthly gains and the S&P 500 is up 2% for September through Wednesday's close.

One reason why payment stocks have been hard hit: the group is actually more closely tied to the momentum trade that has faltered this month than the FAANG stocks are, according to DataTrek Research. Investors betting on momentum typically buy shares of companies that have risen the most in the past 12 months and sell relative losers, betting the outperformance of the former will last long enough for them to reap a profit. In recent years, momentum bets have often included growth stocks, which typically look expensive compared with the broader market but offer higher-than-average profit growth.

Because FAANG stocks have logged huge gains over the past couple of years, it is easy to mistakenly categorize them as momentum stocks, according to DataTrek. In reality, the volatility FAANG stocks have run into over the past year has kept them out of many exchange-traded funds and baskets that follow the momentum trend.

For instance, the iShares Edge MSCI USA Momentum Factor ETF includes Mastercard, Visa and PayPal, which have all handily outperformed the S&P 500 with gains of more than 20% year-to-date. The ETF, however, excludes all five FAANG stocks. It has fallen 1.2% in September, on course to post its first monthly decline since May.

"'Big tech' continues to work despite the shift out of momentum names because only one, Microsoft, actually fits that bill," DataTrek co-founders Nicholas Colas and Jessica Rabe said in a note. "All of the volatility in Apple, Facebook and Alphabet over the past year has actually insulated these stocks from the recent 'momentum meltdown.'"

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(END) Dow Jones Newswires

September 26, 2019 08:14 ET (12:14 GMT)

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