A Blog by Jonathan Low

 

Aug 29, 2019

Why Big Tech FAANG Stocks Are Losing Their Luster For Investors

This is what happens when you go from being the disruptor to the potentially disrupted. JL

Michael Wursthorn reports in the Wall Street Journal:

Owning shares of Facebook, Amazon, Apple, Netflix and Google parent Alphabet has given investors little upside over the past 12 months. All the stocks, with the exception of Alphabet, peaked last year and remain below their records after a selloff last fall wiped out billions in market value. The stocks have shed $415 billion since August 2018. Investors  bought the shares for the companies' growth potential and dominance over their industries.But those prospects aren't a given anymore. Instead of valuing them as upstarts with limitless potential, investors are pricing in slowing growth, rising costs and greater government oversight.
The FAANG trade is losing its bite.
Owning shares of Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. has given investors little upside over the past 12 months, depriving the long-running bull market of one of its biggest drivers.
All the stocks, with the exception of Alphabet, peaked last year and remain well below their records after a brutal selloff last fall wiped out billions of dollars in market value. The stocks have shed nearly $415 billion since August 2018 when their combined market value swelled to $3.7 trillion.
Despite a sharp rebound in the first half of the year, the shares have struggled to reclaim their highs, a trend that is mirrored in the S&P 500 and other major indexes.
The S&P 500 is flat since mid-2018 despite a 15% jump from December. Any significant rally rests on the participation of the FAANGs or the emergence of a new group of stock-market leaders, analysts and investors say.
The FAANG stocks together account for nearly 20% of the value of S&P 500, giving them considerable influence over the direction of the stock market, analysts say. The group drove much of the decadelong rally, eventually becoming the most popular trade among big money managers through most of last year.
But the trade has been losing its luster, and investors have shifted into other bets, calling for a strengthening U.S. dollar, and, more recently, a rise in U.S. Treasury prices, according to Bank of America's monthly fund-manager survey.
The shift is an about-face for the five companies that had been long viewed as the darlings of the technology sector. For several years, investors reliably bought the shares for the companies' massive growth potential and dominance over their respective industries.
But those prospects aren't a given anymore, said some investors who are reassessing their outlooks and treating the companies as single entities rather than a lockstep bloc. Instead of valuing them as nimble upstarts with a seemingly limitless potential for expansion, investors are increasingly pricing in slowing growth, rising costs and the potential for greater government oversight.
And some are trimming positions, looking beyond those familiar names in their hunt for outsize returns.
Mutual funds cut their exposure to Facebook, Amazon, Netflix and Alphabet in recent months, pushing their positioning among those stocks down to one of the lowest levels since hitting a high in 2016, according to fund-positioning data compiled by Bank of America Merrill Lynch.
Now, Facebook, Amazon, Apple, and Netflix are all among mutual funds' biggest underweight positions relative to their benchmarks, according to Goldman Sachs data on fund holdings, while Alphabet remains the lone overweight for many managers.
The FAANGs "broadly haven't done a whole lot the past year," said Brook Dane, a co-portfolio manager of Goldman Sachs's Technology Opportunities Fund, which has trimmed its holdings of Facebook shares, while maintaining a lower exposure to Apple. Each of them has "had all kinds of issues popping up, forcing investors to reassess profit margins and growth rates," he said.
Other analysts dismiss the influence of the FAANG stocks, arguing the stock market has gone through several periods of shifting leadership while still managing to hit records. At one time in the late 1990s, Microsoft Corp., Intel Inc., Cisco Systems Inc. and Oracle Corp. accounted for nearly 14% of the S&P 500's capitalization, leading analysts to dub the companies the "Four Horsemen." Those stocks eventually stopped climbing together, but the S&P 500 still powered to new highs.
"There's always periods of narrow trading," said Dan Morgan, a senior portfolio manager who focuses on tech at Synovus Trust Co., adding that there were the "Nifty Fifty" hot stocks, including Coca-Cola Co. and Gillette Co., that dramatically rose in the early 1970s before falling in the 1973-74 bear market. "When it's so concentrated, that's when you set yourself up for real problems."
Despite its recent outperformance, Facebook was among the first of the big tech stocks to stumble. Revelations last year that the social-networking giant had improperly shared user data with the now-defunct Cambridge Analytica sent shares on a roller coaster that erased a quarter of their value in 2018.
The stock has recovered somewhat, rising 38% this year thanks in part to solid earnings. Still, shares are up only 3.3% through Monday's close from the same time last year and down 21% from their high of $217.50 set in July 2018.
Though it pared back its exposure to Facebook, Goldman's tech fund added shares of Alphabet earlier this year after the search and advertising giant posted its slowest revenue growth since 2015, expecting it to eventually rebound, Mr. Dane said. While most of the other FAANG stocks have declined since the end of June, Alphabet is up 8.2% after it delivered better earnings in the second quarter.
Beyond that, Mr. Dane said he believes the biggest opportunity in tech rests in software. The Goldman fund has positions in ServiceNow Inc., which provides software to help facilitate help-desk workflow at companies, and Atlassian Corp., an Australian company that trades in the U.S. and provides tools to software developers. Both are up at least 50% from last August.
Among the other FAANG stocks, Netflix has fallen 20% since the end of June, leaving it down 18% from last summer after the video streaming company suffered its first decline in U.S. users in almost a decade. The slowdown comes as investors weigh Netflix's ability to compete with several big rivals that are launching their own streaming services, including Walt Disney Co. and AT&T Inc.
Amazon, meanwhile, snapped its run of record quarterly profits in July and missed analysts' estimates due to rising costs. Shares are down 7.2% from last August, despite their 18% year-to-date gain, lagging behind the performance of several retailers, including Target Corp. and Dollar General Corp.
And investors continue to reassess the prospects of Apple. Traditionally investors favored the company's steady rollout of new phone, tablet and accessory products each year, but the focus has been shifting to Apple's service business, "a linchpin to the company's valuation," said Daniel Ives, an analyst at Wedbush. The services business helped Apple beat analysts' earnings estimates last month despite another quarter of weak iPhone sales. Shares are up 4.3% since the end of June, but off 12% from their peak last October.
"The fundamentals of these businesses matter a lot more now for these stocks," said Goldman's Mr. Dane. "It's healthy the market is starting to discriminate more and the FAANGs are no longer a one-directional buy process."

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