Stocks preferred by retail investors are handily beating those liked by hedge funds and mutual funds, according to Goldman Sachs Group Inc.

A portfolio of stocks popular among individuals has surged by 61% since the bear market trough compared with a gain of 45% for both hedge fund and mutual fund favorites and a 36% rise in the S&P 500 Index, strategists led by David Kostin wrote in a note June 12. And investors should consider value shares, they said.

“The narrative of Main Street weakness versus Wall Street asset inflation is misleading,” the strategists said. “The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks.”

The Russell 1000 Value Index has risen 4.3% since May 22, twice the gains in its growth counterpart, as evidence began to emerge of a rebound from the coronavirus-fueled economic downturn. Signs of optimism from small investors are popping up elsewhere in the market, with daily turnover in retail favorites jumping, speculative fervor in options reaching what Sundial Capital Research Inc. called a “stunning” level, and buyers piling into insolvency stocks.

Small investors' stock picks have outperformed mutual-fund favorites

Wide valuation dispersions signal long-term opportunity for value investors, Goldman said, though it may mean a bit of a bumpy ride, as recent market action has shown.

“Despite the recent value rally, the dispersion of stock multiples is still extremely wide relative to history,” the Goldman strategists wrote. “The volatile rotations in recent weeks underscore just how difficult timing that opportunity can be.”

Last week’s 4.8% drop in the S&P 500 amid the retail exuberance could spell an opportunity for anyone looking to hedge, according to RBC Capital Markets strategist Amy Wu Silverman.

Investors who want to bet against continued fervid buying by small investors could consider purchasing July- or August-dated put options in some stocks that appear to be beneficiaries of strong mom-and-pop enthusiasm, such as Sony Corp., Apple Inc., Tesla Inc. and Ford Motor Co., Wu Silverman said.

“After a steady climb since late March, last week’s move was a wake-up call for retail and institutional investors,” she said. “Veteran investors have experienced bumpy markets before. How will the newly minted Covid at-home day traders react to the first major hiccup since the late March bottom?”

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