NYU’s ‘Dean of Valuation’ says growth stocks have more room to fall as interest rates go higher

Published Tue, Mar 16 20216:16 PM EDTUpdated Tue, Mar 16 20216:30 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Growth stocks have room to decline further if interest rates continue to rise, New York University finance professor Aswath Damodaran told CNBC on Tuesday, A rapid increase in bond yields this year has put pressure on equities with high multiples. The 10-year Treasury yield, which began 2021 under 1%, was trading above 1.6% Tuesday. Some on Wall Street, notably BlackRock's Rick Rieder, believe the yield could hit 2% this year . "In general, when rates go up, growth companies feel the pain a little more than mature companies for a simple reason: their earnings and cash flows are way out in the future, and higher rates make them less valuable," Damodaran said on "Closing Bell." "That's always been true." Now, investors must also consider the strong performance growth companies have had in recent years, Damodaran said. "Growth stocks have had a tremendous decade. You're looking at gains that have mounted over the years. I think growth stocks have a little more price appreciation to give up," said Damodaran, who is known as the "Dean of Valuation" for his company analyses. There's been a shift so far this year into cyclical stocks that would benefit as the U.S. economy recovers from the coronavirus pandemic. Energy and financials, which are typically associated with value, have been among the strongest performers. Damodaran said he sees that rotation playing out further. "I don't think growth is going to beat value in the long term or that value is going to beat growth in the long term," he said. "I think the steady state now is you're going to go back and forth, and I wouldn't be surprised to see value have its moment in the sun, at least in the near term." What's a fair price for bitcoin? Damodaran also weighed in on the major rally in cryptocurrencies lately, including bitcoin, which is the world's largest by market capitalization. The digital coin is already up over 90% year to date, according to Coindesk data , building on its ascent that began last year. Bitcoin was trading above $56,000 per coin Tuesday evening. About six months ago, in mid-September, it was priced below $11,000. "Whether bitcoin is a currency or a collectible, it cannot be valued. It can be priced," Damodaran said. "The question we can ask is, is $50,000 or $60,000 a fair price for bitcoin. From my perspective, I don't see it as a fair price." Some bitcoin bulls see it a strong store of value that can be used to hedge against inflation. For his part, Damodaran said he was not opposed to the notion of cryptocurrencies in general. However, he contended bitcoin is not a good way to conduct transactions. "As a collectible, it's gone up a lot, but it's not gone up at the right times," he added. "In fact, last year, when stocks were collapsing, bitcoin went down even more. That's not what you want in a collectible," he said. Damodaran stressed he did not "have a problem" with those who believe cryptocurrencies — which run on decentralized digital ledgers known as a blockchain — can help change global finance. However, he said, "it has to be a better designed crypto than bitcoin. Bitcoin is a crypto designed by paranoids for paranoids. It's really not a crypto that you can use as a currency on a broad basis. I think there will be a good cryptocurrency. I just don't see how bitcoin can be it."

Traders work on the floor of the New York Stock Exchange.

NYSE

Growth stocks have room to decline further if interest rates continue to rise, New York University finance professor Aswath Damodaran told CNBC on Tuesday,

A rapid increase in bond yields this year has put pressure on equities with high multiples. The 10-year Treasury yield, which began 2021 under 1%, was trading above 1.6% Tuesday. Some on Wall Street, notably BlackRock's Rick Rieder, believe the yield could hit 2% this year.

"In general, when rates go up, growth companies feel the pain a little more than mature companies for a simple reason: their earnings and cash flows are way out in the future, and higher rates make them less valuable," Damodaran said on "Closing Bell." "That's always been true."