The performance of 'disruptor' stocks – shares in innovative companies disrupting established industries – has become the stand-out theme of the current long-running bull market. It’s a theme that has spawned the most popular investment acronyms of the day: FAANGS and BATS. And it’s a theme that embraces wildly exciting and sometimes scary visions of the future: a fourth industrial revolution based on machine learning; a healthcare revolution based on gene editing (CRISPR); a transport revolution based on autonomous electric vehicles; an energy revolution based on renewables and battery technology; and even libertarian revolution based on crypto-currency and block chain.
So persuasive is the thinking that 'disruptors' have glorious futures that some value managers (doubtless sick of underperforming their growth-focused rivals) have persuaded themselves that the eye-popping ratings commanded by these types of stocks actually represent a bargain. Anything can be justified by a 'discounted cash flow' model if assumptions about future growth and profitability are bullish enough. Whether one takes the view that it’s all a load of guff or that any investment aside from disruptors represent value traps, a lot of money has been made by people buying the hottest of these stocks.
Given past performance, I thought it may be of interest to attempt to put together a screen aimed at identifying this type of situation. However, while I do think this is an interesting exercise for this column, it is not meant to be a call to arms to go headlong into these stocks, which in many cases have wince-some valuations.