By Amrith Ramkumar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 20, 2020).

Eric Perkins believes Tesla Inc. shares have climbed too quickly, to heights the company's earnings can't sustain. He's still not selling.

A 44-year-old living outside San Diego, Mr. Perkins says he normally would sell to lock in a profit when a stock quadruples in four months. But after missing past Tesla rallies, he is determined to hold on to his shares, which now make up about half of his roughly $1 million portfolio.

"I don't see anything stopping the momentum, at least until earnings are announced," said Mr. Perkins, who drives a Tesla Model X. The electric auto maker reports second-quarter earnings on Wednesday. Shares hit a record of $1,546 this past Wednesday, giving Tesla a market value of $287 billion -- higher than that of titans like Intel Corp. and Home Depot Inc.

Tesla is one of a handful of stocks whose recent surge continues to power the broader market higher. These companies like tech stalwart Amazon.com Inc. and vaccine maker Moderna Inc. have lifted the Nasdaq Composite to fresh records recently and helped push the S&P 500 up 44% from a multiyear low hit in March.

After a monthslong rally, the stocks now make up a large chunk of the overall market. That helps explain a growing rift that many people are struggling to understand: why the market is rallying when the economy is stumbling.

Momentum stocks are popular among investors who buy shares because they are rising and sell stocks that are falling, with little regard for economic or market fundamentals.

Some momentum stocks, like Tesla, have yet to record a full-year profit, but their future potential and recent stock performance have still attracted hordes of buyers in recent weeks. Many of these investments are mainstays for individuals using apps like Robinhood. They have increased their trading activity lately, buying all sorts of things that worry professionals, including shares of companies on the brink of bankruptcy.

The swings are a concern for analysts who worry that the gains could reverse suddenly, sending major indexes into a tailspin and even destabilizing the economy because of how many investors hold the stocks. If it records a fourth consecutive quarterly profit Wednesday, Tesla could earn inclusion into the S&P 500, making it even more widely owned through funds tied to the index and increasing the company's sway over financial markets.

Retired hedge-fund manager David Rocker worries that big gains in shares of unprofitable companies represent market manipulation and excesses in the financial system even more extreme than the late 1990s dot-com bubble. Mr. Rocker was known for short selling -- wagering on falling stock prices by borrowing shares, selling them, then aiming to repurchase at lower prices. He argues that government and central-bank stimulus is contributing to the phenomenon, adding to a mountain of debt that will eventually hurt the economy.

"This is going to end in tears and do enormous damage," he said.

Short sellers of Tesla and other so-called momentum stocks have suffered losses lately, forcing them to buy shares at higher prices to close out weakening positions, a trend known as a "short squeeze" that can add further fuel to rallies.

Investors this week will be monitoring a flurry of earnings results from companies tied to momentum and popular among retail traders including Tesla and Microsoft Corp.

"People want to pile into what's working today," said Michael Lippert, who manages the Baron Capital Opportunity Fund that counts both companies as large holdings.

Amateurs aren't the only ones chasing returns in momentum stocks. Quant funds and other strategies that trade factors such as momentum and volatility have grown in popularity in recent years. Some of these funds along with individual investors are often quick to buy stocks that are doing well, then can sell just as fast when trading conditions shift.

This was illustrated on Monday, when stocks erased gains after California said it would roll back its reopening amid a surge in coronavirus cases. Tesla rose as much as 16% before closing lower, while the Nasdaq ended the day down 2.1% after advancing nearly 2% earlier in the session.

Despite the jarring moves, many remain confident in momentum stocks because many of the companies are perceived as beneficiaries of trends like remote work that are being accelerated by the pandemic. About 74% of fund managers surveyed in a recent Bank of America monthly poll said owning tech stocks was the most crowded trade in the market, the highest percentage of any trade going back to 2013.

"We are in a market that is incredibly bifurcated between the winners and losers," said Holly Framsted, head of U.S. Factor ETFs at BlackRock Inc.'s iShares division.

Mark Castro, a 34-year-old nurse from the Philippines, shares a roughly $10,000 portfolio with his wife concentrated in Netflix Inc. and vaccine companies Moderna and Inovio Pharmaceuticals Inc. He tries to capture short-term gains in stocks based on their trading patterns, so he buys and sells often, particularly when activity in a stock is frenzied and volume rises.

"With volume I can ride the momentum," he said. "It's a powerful force."

William Beyer began trading stocks in April after receiving his stimulus check from the federal government. The 28-year-old in Northfield, Minn., has a roughly $2,000 portfolio featuring stocks like fuel-cell company Plug Power Inc. and Chinese electric-vehicle maker NIO Inc.

After losing money earlier in the year trading based on momentum, Mr. Beyer is now trying to incorporate trends like 5G broadband technology into his strategy.

"It is very risky," he said of short-term momentum trading. "If you don't get out at the right time, it's going to turn red really quickly."

While he and many other investors eventually expect a reversal in Tesla shares as a result, believers in the company like Mr. Perkins outside San Diego remain hopeful.

"Taking money off the table at this point would be a mistake," Mr. Perkins said.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

 

(END) Dow Jones Newswires

July 20, 2020 02:47 ET (06:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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