Is The Smart Money Rotating Out Of Social Media And Into Emerging Markets?

by: Charles Lewis Sizemore, CFA

Over the past few weeks, popular American momentum stocks have been in a steep correction. To throw out a few familiar names, Tesla Motors (NASDAQ:TSLA), Netflix (NASDAQ:NFLX) and Twitter (NYSE:TWTR) are all down more than 15% over the past month, and King Digital Entertainment (BATS:KING) just witnessed a spectacular flameout in its IPO.

Meanwhile, emerging markets-as measured by the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM)-are flat over the same time period and have actually been enjoying a modest rally over the past two weeks. What conclusions can we reach here?

In my view, it appears that we may be in the early stages of a change in leadership. While the high-fliers of last year are currently in freefall, investors are not necessarily fleeing all risky assets, as the recent performance of emerging markets demonstrates. But with the valuations of social media and new technology stocks having surpassed bubble levels a long time ago, it would appear that the hot money is rotating elsewhere.

Investors haven't exactly embraced emerging markets in 2014; mutual fund and ETF outflows had already surpassed the 2013 total by mid-February this year. But it would appear that after consistent declines over the past three years and a never-ending stream of serial crises (Argentina peso collapse… hyperinflation in Venezuela… the Russian annexation of Crimea… corruption scandals in Turkey and South Africa), prices are cheap and there is simply no one left to sell.

These are the moments a contrarian value investor lives for.

Actions to take:

  1. Don't try to buy the dips in social media and new tech stocks. They could enjoy another leg up. Anything is possible. But I suspect that the gig is up and that the smart money is moving on.
  2. Aggressively accumulate emerging-market equities. An aggressive investor could buy a basket of single-country ETFs, including the iShares MSCI Turkey ETF (NYSEARCA:TUR), which I recommended last week, the MarketVectors Russia ETF (NYSEARCA:RSX), the Global X FTSE Argentina 20 ETF (NYSEARCA:ARGT) and the iShares MSCI South Africa ETF (NYSEARCA:EZA).

If the current slide in U.S. momentum stocks turns into a broader exodus from risky assets, you will not want to own any of these. So, use a stop loss of 7%-10%. But if I'm right, and the hot money is about to rediscover beaten-down emerging market stocks, then I expect to see all of these positions return 50%-100% over the next 12-18 months.

Disclaimer: This site is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results.