Leading Stocks of Last Year Decline Year to Date

Last year many investors holding value stocks were bruised by losses, while growth investors outperformed them for the year and on a five-year average annual basis, using the iShares S&P 500 Growth and Value ETFs as a rough measure. Though it is unsure what it will mean for investors sticking to value, at least in the first few months of this year some of the leading high-growth, high-valuation tech names they mainly shunned have fallen off their pedestal.

Most notably, the highest returning stock of 2015, Netflix (NFLX, Financial), has declined 14.2% year to date. The stock gained 134% for the year as one of the few propping up the S&P 500’s returns. With its 350.7 P/E ratio and declining earnings estimates, David Einhorn (Trades, Portfolio) of Greenlight Capital disagreed with the market’s perception too early and shorted the stock last year, weighing on his returns.

After 10 straight years of revenue increases, Netflix has acknowledged that its growth has begun to slow. In its fourth quarter earnings call, Netflix CFO David Wells said, “But the larger thing is that it’s just the next 50 million are a little hard than the first 50 million in terms of growth, and we’re doing everything on the content side, on the product side.” Wells also said that “the law of large numbers” would dictate that the percentage of growth in net additions would be smaller every year.

Some of the smaller growth is reflected in the company’s guidance. In the third quarter, Netflix grew global membership by 3.62, falling short of its estimate of 3.02 million. Operating income was $74 million, also below its forecast of $81 million.

In the fourth quarter, Netflix continued more rapid global growth, adding a record 5.59 million members compared to a forecast 5.15 million and prior-year additions of 4.33 million. For the first quarter, ibut also said t expects 6.1% global additions. In the U.S., however, new adds were down, at 1.56 million compared to 1.90 million the prior year. The company attributed some of the decline to new credit and debit card rollover problems, but also said its prevalence in the U.S. “seems to be making net additions hard than in the past.”

Another sore spot (and Einhorn short), Amazon (AMZN, Financial), has seen its shares fall 14.5% year to date after gaining 118% for 2015. While continuing to increase its top line over the past 10 years, Amazon’s yearly profits have been hit or miss as it fuels its breakneck growth, and the market assigns it a P/E ratio of 467.8.

Its fourth-quarter results continued to inspire Amazon believers, with a year-over-year net sales increase of 22% to $35.7 billion. Net income also improved year over year, totaling $482 million, or $1.00 per diluted share, versus $214 million, or 45 cents per diluted share, and Amazon expects it to grow between 17% and 28% in the first quarter. Amazon also continued to expand into original series, original movies, prime music streaming, wind faming and Amazon Web Services Cloud, among other areas.

Nevertheless, Einhorn disclosed a short position in November 2014 as part of what he called his “bubble basket.”

“One of the principal bullish assumptions supporting many bubble stocks is, ‘the company is growing too fast to be very profitable,’” Einhorn’s third quarter letter said. “We think AMZN is just one of the many stocks for which this narrative will ultimately prove false.”

Other similar stocks have reverted from their high gains last year, but have fared better year to date. Alphabet (GOOGL, Financial) gained 46% in 2015 and declined 3% year to date; Facebook (FB, Financial) gained 31.5% in 2015 and 7.4% year to date; and Apple (AAPL, Financial) declined 5.8% in 2015 and was up 0.25% year to date. The S&P 500 also had declined 0.67% year to date.

Howard Ward, the chief investment officer of growth equities at GAMCO, a firm run by Mario Gabelli (Trades, Portfolio), who describes himself as a combination between Graham & Dodd and Warren Buffett (Trades, Portfolio), has a different opinion about the fate of these tech stocks.

“I think some of those momentum stocks are real secular growers that have tremendous prospects for continued top-line and bottom-line growth over the next several years,” Ward told Bloomberg this morning.

“Whether you’re talking about either a Facebook – there is only one Facebook – I’m sorry, there really is no competition. If you’re talking Google, i.e. Alphabet, same thing, there is only one. If you’re talking Amazon, okay Amazon, between its Amazon Web Services, and its retail juggernaut for online shopping, there is really only one.”