Profitable inefficiencies are developing, Real Money’s James ‘Rev Shark’ says.
Stock traders are looking for pricing inefficiencies in what TheStreet’s James “Rev Shark” Deporre calls a “big and sloppy” trading environment.
Are they finding any opportunities for profit?
To a limited extent, yes.
“The start of a new year often triggers positioning for investment themes that strategists are predicting,” Deporre wrote recently in Real Money. “One of the significant themes that many experts are focused on is higher inflation and interest rates.”
According to Rev Shark, the stocks that suffer the most from the perception of higher inflation and interest rates are high price-to-earnings (P/E) growth stocks that tend to be technology related. “These stocks often won’t have significant earnings until many years from now, and that future income stream is worth less when interest rates are high,” he said.
Meanwhile, the money that rotated out of the high P/E growth names found its way into banks, financials, automobiles and more traditional growth names.
“A good illustration of what happened can be seen when comparing ARK Innovation ETF (ARKK) – Get ARK Innovation ETF Report, which is made up mostly of high P/E growth names, and Warren Buffett’s Berkshire Hathaway (BRK.B) – Get Berkshire Hathaway Inc. Class B Report, which holds financials and value names,” Deporre noted.
The good news is that this rotational action is all over the place, which does create inefficiencies in pricing that eventually will be corrected.
“The bad news is that the rotational pressure can continue for a while, and there is no way to time when the overshoots in the market may reverse,” Deporre said.
