What happened
Shares of Hubspot (HUBS 2.96%), Shopify (SHOP 4.90%), and Snowflake (SNOW 2.69%) all fell hard on Tuesday, with all three stocks down by 10% to 11% as of 2 p.m. ET.
There didn't appear to be any company-specific reasons for their declines. Rather, the big sell-offs were likely a symptom of the broad and ongoing shift in investor preference away from high-priced growth stocks and toward lower-priced value stocks.
Here's why that's both good and bad news for shareholders.
Image source: Getty Images.
So what
The good news is, these sell-offs don't have anything to do with these companies' competitive positions, management teams, or growth potential. The bad news is that the factors pushing these stocks down may not abate anytime soon.
Hubspot, Shopify, and Snowflake have been big winners in the market to date, but after years of outperformance, their valuations are sky high. None of the companies mentioned make material profits today, as they are all investing heavily in growth, and Snowflake is actually racking up some pretty hefty losses. Even after Tuesday's sell-off, these stocks are trading at price-to-sales ratios of 21.3, 36.5, and 86.0 times sales, respectively.
SHOP PS Ratio data by YCharts
While long-term winners often look expensive, those valuations are really pretty stretched. That leaves these stocks vulnerable to big declines, either if A) management makes a business mistake that hurts the companies' financials, or B) rising inflation and higher interest rates materially impact them.
It looks as though fears over scenario "B" are on traders' minds now. The 10-year Treasury bond yield -- which many investors and asset managers use as a proxy for the so-called "risk-free rate of return" -- rose materially Tuesday to about 1.67%, closing in on highs it hasn't touched since last March. That means investors are requiring higher returns on long-duration assets like stocks.
The Federal Reserve has also begun tapering its asset purchases due to the strong economy and rising inflation. When the Fed does that, it essentially takes liquidity out of the market, which leads investors to focus more on earnings and dividends today, rather than on potential earnings further down the road.
That is making other types of stocks look better -- among them, banks, which should benefit from higher interest rates and which currently trade at rather cheap valuations. In addition, oil prices were rising Tuesday following Tuesday's OPEC+ meeting. Oil stocks are paying out massive dividends thanks to the current high crude prices, so investors may be harvesting their winners to put money into those more beaten-down, dividend-paying sectors.
Now what
The Motley Fool enthusiastically espouses the virtues of buying shares of outstanding companies and holding them for the long term. While that strategy may sound simple, in order to reap big rewards, investors must be able to hold on through corrections such as these.
Corrections can be painful, and they can last a while. Interest rates have been incredibly low for a long time, so if inflation and interest rates rise further for longer, it's possible that these stocks could remain depressed for some time -- even if the businesses that underlie them remain robust.
For younger investors who already have positions in these stocks, I'd probably lean toward holding on. However, older investors who are nearing retirement may wish to rotate with the market into cheaper dividend-paying stocks to reduce their risk levels in the event of further volatility.
And for those who don't own shares of Hubspot, Shopify, or Snowflake? It's always a good idea to keep great companies like these on your watch list. However, these companies' stock prices still look rather steep even after Tuesday's correction. They may well get cheaper this year if the Fed raises interest rates as it has indicated that it will.
