The stock market has just fired a warning shot on stocks for home use

Tuesday was a strong day for the stock market, with investors hoping that the near future could bring a much bigger stimulus package that would help boost the US economy. Earnings for Dow Jones Industrial Average (DJINDICES: ^ DJI) relatively modest, but more marked gains for the S&P 500 (SNPINDEX: ^ GSPC) and Nasdaq Compound (NASDAQINDEX: ^ IXIC) reflected a general upward trend across the market.

Data source: Yahoo! Finance.

Investment strategies driven by momentum have done extremely well in the past nine months, and companies that have managed to provide much-needed products and services to those who need to stay home due to the COVID-19 pandemic are among the best performers. However, some prominent domestic growth stocks fell on Tuesday, missing the recovery and raising the question of whether broader market rotation could be imminent.

Fair warning

The warning shot came from analysts at UBS, who were examining some actions that benefited most from the stay-at-home movement. UBS ended up downgrading three neutral shares to sell, including Peloton Interactive (NASDAQ: PTON), Fiverr International (NYSE: FVRR)and Chewy (NYSE: CHWY).

Investor responses were very different. Chewy shares fell just 1%. Peloton, however, sank 5%, and Fiverr took the biggest drop with a 10% drop.

Image source: Getty Images.

Interestingly, however, the commentary that accompanied the downgrades was not entirely negative. In the case of Peloton, for example, UBS still believes that the pioneer in home and connected fitness equipment is gaining market share in gyms and regular gyms, even with the pandemic under control. Brand loyalty is strong and Peloton has taken steps to increase manufacturing capacity. However, even when raising its target price on Peloton by $ 9 to $ 124 per share, UBS believes that the current price is simply higher than the potential rewards.

Likewise, Fiverr took advantage of the growing demand for gig economy work both in the United States and worldwide, and has yet to grow in the view of UBS. This ensured a substantial increase from $ 42 in the target price to $ 190 per share. But with the stock price well above that, Fiverr is unlikely to grow fast enough to justify extremely high valuations today.

Finally, Chewy took great advantage of the online pet food and product category, and there is some potential for expansion. However, it will be difficult for the retailer to outperform its sales performance in 2020, making compositions difficult and potentially cooling inventory. UBS kept its price target of $ 75 per share unchanged.

Will investment in growth stop working?

First, investors should understand that there is nothing special about today’s calls against some of the stocks with the greatest momentum in 2020. Investors often end up seeing a day’s impact on calls like these just to have the momentum reassert themselves. and for the stock to start rising again.

In the end, the easiest thing for long-term investors is to assess whether they believe that something has fundamentally changed in the companies whose shares they own. Even UBS seems to recognize that Fiverr, Chewy and Peloton have solid growth prospects.

Presumably, if stock prices were to fall, it would lead analysts to come back and increase stocks. Then, the stock price would skyrocket, and the chances are good that investors have been hurt and have to buy back at a higher price. With that in mind, you can get a better result just by holding stocks, if you think they are still ready for long-term growth.