Title: Nvidia’s Soaring Rally Divides Fund Managers as Valuation Concerns Linger
Subtitle: Many Funds Underperformed Key Equity Indexes Amidst Nvidia’s Meteoric Rise
Date: August 30, 2023
New York, NY – Semiconductor company Nvidia Corp’s remarkable surge in stock value has left a significant number of fund managers hesitant to invest due to concerns over its high valuation. Despite Nvidia’s shares more than tripling in value this year, many funds have held lower-than-average weights of the stock in their portfolios, making it challenging for them to outperform benchmark indexes.
According to recent regulatory filings analyzed by Morningstar, out of the approximately 330 mutual funds benchmarked to the S&P 500 or a similar index, only 15% held a weight in Nvidia above that of the index. Alarmingly, 85% of the funds that held a below-average weight in Nvidia underperformed the index this year.
Nvidia’s exorbitant valuation has been the primary deterrent keeping some investors away. The stock currently trades at a forward price-to-earnings ratio of 33.6, compared to less than 24 for the Nasdaq 100. Chuck Carlson, CEO at Horizon Investment Services, which has assets under management totaling $250 million, expressed caution, stating that while one stock may not make or break their investment portfolio, owning a stock that triples in value would undoubtedly be beneficial.
Other concerns among investors relate to whether chip demand will sustain current levels and how the artificial intelligence landscape will evolve. Despite these reservations, Nvidia’s shares have continued to soar, reflecting the market’s optimism surrounding the prospects of artificial intelligence.
The evaluation of Nvidia’s shares aligns with broader investor speculation on whether the impressive rally seen in big tech and growth stocks has more room to run. Some market watchers have expressed caution due to inflated valuations and recent volatility in the market. The S&P 500, which counts Nvidia and other megacap growth stocks among its constituents, has retreated 2% from its late July highs while still boasting a year-to-date gain of approximately 17%.
Notably, Nvidia, along with six other megacap stocks including Apple, Microsoft, and Amazon, has been responsible for approximately 73% of the S&P 500’s total return this year, according to S&P Dow Jones Indices. Yet, mutual funds have generally been under-allocated to these stocks, resulting in a “widest ever” underweight in their portfolios, as highlighted by Goldman Sachs. This underweight position has significantly impacted mutual fund performance in 2023, noted Goldman Sachs in a recent note.
Despite its exceptional performance, Nvidia remains an under-owned stock in actively managed portfolios. According to Morgan Stanley, Nvidia was the third-most under-owned stock out of 15 large tech and growth stocks included in their analysis. This, coupled with Nvidia’s historically high valuations, has prompted cautious sentiment among investors.
Jeremy Schwartz, the global chief investment officer at WisdomTree, highlighted Nvidia’s forward price-to-sales ratio, indicating that stocks with similar ratios in the past have experienced a median decline of 36% relative to the S&P 500 in the following 12 months. Michael Purves, CEO of Tallbacken Capital Advisors, echoed these concerns and recommended clients hold bearish short-term options positions in Nvidia as a potential hedge against a market downturn.
As Nvidia’s stock continues to reach record highs and analysts increase earnings estimates, the debate among fund managers regarding its true value persists. While praised for its impressive rally, the possibility of a significant correction in Nvidia’s stock price remains a matter of caution for some investors.
Disclaimer: This article contains predictions and opinions that do not represent financial advice. Readers should conduct their own research and consider their investment strategies.