As FAANG stocks falter, fund managers make bets on
survivors
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[December 22, 2018]
By David Randall
NEW YORK (Reuters) - A bear market in the
so-called FAANG stocks - Wall Street's most popular trade going into the
year - is pushing fund managers into searching for the next big growth
companies that can lead the overall market higher.
Shares of Facebook Inc <FB.O>, Amazon.com Inc <AMZN.O>, Apple Inc <AAPL.O>,
Netflix Inc <NFLX.O>, and Google-parent Alphabet Inc <GOOGL.O> reached
record highs in July.
Since then, problems ranging from Facebook's data privacy scandals to
Apple's declining iPhone sales to Netflix's rising cash burn rate have
cratered the stocks, helping push the tech-heavy Nasdaq Composite index
to the edge of a bear market. The Nasdaq lost another 1.7 percent in
midday trading Friday.
With shares of the FAANGs down by an average of 25.6 percent since the
start of the quarter, fund managers and analysts are starting to
reconsider their approach to growth, treating the FAANG stocks less like
a single bloc and more on their individual merits.
"This was a year when at the start of it you had to own the FAANG names
and at the end of it you don't want to own any of them," said Kevin
Landis, portfolio manager at the Firsthand Technology Opportunities
fund.
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Landis, who has been trimming his position in Apple yet still holds
Amazon.com and Alphabet among his 10 largest positions, said that the
FAANG group is breaking down as the companies mature and their growth
plateaus.
As a result, he is trimming his position in Netflix and instead adding
to his position in streaming television company Roku Inc <ROKU.O>, which
has a market value of approximately $3.3 billion, compared with
Netflix's market value of $116.3 billion.
"It's hard to see Netflix growing here by an order of magnitude, but
it's easy to see Roku growing by an order of magnitude as the
cord-cutting trend picks up steam," he said.
FAANG FUNDAMENTALS
There are still things to like about each FAANG stock, of course.
Netflix surprised analysts with its subscriber growth in its most recent
quarter, for instance, while Facebook is continuing to grow quickly
overseas and Amazon's profitability came in higher than Wall Street had
predicted.
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A trader works on the floor at the New York Stock Exchange (NYSE) in
New York City, New York, U.S., December 4, 2018. REUTERS/Brendan
McDermid/File Photo/File Photo
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Yet each company is also facing hurdles that belie the notion that they will
continue to dominate the stock market. Netflix, for instance, is trying to
weather a faster cash burn rate as the cost of content increases, while revenue
growth for Google's search and YouTube advertising is slowing amid stronger
competition from Amazon.
Facebook is facing higher costs and greater regulatory scrutiny, while Apple
grapples with a slower-growing market for smart phones and Amazon is weighed
down by higher spending costs.
It's been a "slow motion train wreck," said Michael Pachter, an analyst at
Wedbush Securities.
The steep slide in the stock market will likely break apart the popularity of
investing in the stocks as a single trade, he said. "Facebook has almost daily
scandals and Netflix has the impending loss of Disney/Fox content, but the
others have really done nothing wrong at all," he said.
Tom Plumb, portfolio manager of the Plumb Equity fund, said that he has largely
stayed away from the crowded FAANG stock trade because of their high valuations.
Yet of the group, he expects that Facebook is the least likely to rebound
quickly, cracking the group further.
"Companies that have depended on the social media advertising are going to see
some incredible regulatory scrutiny and I'd like to see a couple more quarters
at least to see how they've adjusted their business models" before buying their
shares, he said.
Instead, he is increasing his position in companies with strong recurring
revenue streams such as Adobe Inc <ADBE.O>, Visa Inc <V.N>, and Microsoft Corp <MSFT.O>.
"You don't get to buy companies at panic prices unless there's a panic, and I
think there's an incredible amount of anxiety in the market right now," he said.
(Reporting by David Randall; Editing by Jennifer Ablan and Nick Zieminski)
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