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One way to play the rally in growth stocks, trader says

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One way to play the rally in growth stocks, trader says

Growth is racing ahead of value this week and Todd Gordon, managing director at Ascent Wealth Partners, said it's a trend that should continue.

"What we've seen since the market has found a bottom and has come roaring back is we're seeing growth outpace value. And if we think about it, before the coronavirus pandemic, we were seeing that same dynamic. We're seeing technology, we're seeing new-age technology lead the traditional, let's call it, old economy stocks," Gordon said Thursday on CNBC's "Trading Nation."

The IVW growth ETF, which holds stocks such as Microsoft and Facebook, is up more than 4% this week, while the IVE value ETF has risen 1.5%. It's a return to form for the markets which have skewed toward growth stocks through the decadelong expansion.

Growth investors favor these stocks for their future earnings potential and are willing to pay a premium. Value stocks, on the other hand, are seen as "cheap" relative to the rest of the market.

Gordon said while valuations may be high for these companies – a 25 times multiple for the IVW ETF compared with 19 times for the S&P 500 – the potential future growth is worth the high price tag.  

"Are valuations being stretched? Perhaps, but again, I've said this multiple times, what is the market pricing in terms of technology that is going to change our interactions? I think we were on a set timeline pre-coronavirus pandemic and that has just shortened the timeline. So, this is not so much a game of valuations, but we're taking about stocks that have massive moves in here that potentially could change the way we interact as a society here in a new digital age," said Gordon.

Microsoft, Apple, Amazon, Facebook, Google parent Alphabet, Visa, Mastercard and Netflix are among the stocks Gordon sees leading the pack.

To take advantage of expected strength, Gordon is buying the QQQ Nasdaq 100 ETF, which has overlap with the IVW ETF – either outright or using options.  

"If you wanted to use the options market, tap the leverage available to you in the options market, one way that we like to do this, if you wanted, with a stock replacement strategy, is basically what you could do is buy a Delta 80 call. What that means is, the call is going to act 80% of stocks. So, if the stock goes up a dollar, your underlying call will go up 80 cents," he said.

Gordon is buying the July Delta 80 call, costing around $31. The value of the option will rise if the Nasdaq 100 rises by expiration.

Disclosure: Ascent Wealth Partners holds MSFT, AAPL, FB, AMZN, GOOGL, V, MA and NFLX. 

Disclaimer