

Ask Matt: Why are 'hot stocks' are cooling off?

Matt Krantz
This Monday, Feb. 8, 2016, file photo shows the sign of a Chipotle restaurant in Hialeah, Fla.

Q: Why are 'hot stocks' cooling off?

A: It's hard to blame investors who thought picking stocks was easy. After all, investors just needed to buy shares in popular growth stocks like restaurant Chipotle (CMG), electric car maker Tesla (TSLA), apparel maker Under Armour (UA) and maybe a hot alternative energy play like First Solar (FSLR) and watch the money roll in during 2015.

The game has changed dramatically this year. Shares of Chipotle are down more than 25% in 2016 amid plunging revenue and profit. Tesla shares are down this year, too, although a surprise profit reported late Wednesday will trim the losses. Under Armour and First Solar skyrocketed 19% and 48%, respectively in 2015. This year, though, they are down 21% and 38%.

The underperformance of these "growth" stocks is completely predictable, it turns out. Growth stocks, those that trade at the highest prices compared to their net worth or book value, wind up being poor performers relative to how risky they are. The Index Funds Advisor Large Growth index, which contains popular and expensive stocks, has generated a long-term average annual gain of 9.1%. That's below the 9.7% average annual gain by the Standard & Poor's 500. But it gets worse. Large growth stocks are 17% riskier than the S&P 500, so you're getting a lower return and more risk. That's a bad tradeoff.
