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By David Randall
Portfolio managers holding shares of Facebook Inc,Amazon.com Inc, Netflix Inc, and Google-parentAlphabet Inc say they are increasingly concerned thatthe data scandal that has sent shares of Facebook down nearly 15percent year-to-date will spill over into all of the FANGstocks, imperiling the broad market's momentum at a time whenthere are no clear companies or sectors to take their place.
On Tuesday, an index which tracks the FANG stocks along withsix other mega-cap technology stocks tumbled 6.3 percent, thebiggest decline since September 2014.
Facebook rose as much as 1.5 percent in early tradingWednesday before falling into the red, one day after sourcestold Reuters that chief executive Mark Zuckerberg plans totestify before Congress. Amazon.com dropped 4 percent, whileNetflix fell 5 percent. Google-parent Alphabet was slightlypositive.
"There are legitimate concerns over the business models ofthese companies, and I expect that they will be ironed out inlegislation" that will likely eat into their profit margins,said Michael Cuggino, a portfolio manager of the
Cuggino, who would not say whether he was selling any of hisshares in Facebook, said that commodity and industrial stockslook more attractive now given rising inflation and continuedglobal economic growth.
Each FANG company rose more than 33 percent last year,helping power the S&P 500 to a nearly 20-percent gain.Yet those gains have left the broad S&P 500 trading at a hightrailing price-to-earnings ratio of 21.7, leaving it overpriceddespite a boost to margins from the Republican-led corporate taxcut at the end of 2017.
"Rising volatility and changing market leadership are nowpointing towards the possible conclusion that the stock marketpeaked in late January 2018," said Douglas Kass, president ofSeabreeze Capital Management.
The S&P 500 is now down 2.2 percent for the year, and downnearly 10 percent below the high of 2872.87 it reached on Jan.26.
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Fund managers say that the high valuation of FANG stocks andthe likelihood of regulation are pushing them into traditionalvalue stocks like energy and defense companies.
Connor Browne, a portfolio manager at Thornburg InvestmentManagement, said that he sold his shares of Netflix andAmazon.com last year after both companies blew through his pricetargets. He used those gains instead to increase positions inenergy stocks such as pipeline operator Enterprise ProductsPartners LP and crude oil shipping company OverseasShipholding Group Inc that stand to benefit from therecovery in the price of oil.
"We noticed that in all of this excitement over the FANGstaking over the world, there are parts of the economy that seemreally out of favor and offer more compelling opportunities," hesaid.
Even after the selloff, FANG stocks continue to trade athigher valuations than the broad market. Netflix trades at a P/Eof 210 and Amazon.com trades at a P/E of 327. Facebook andGoogle-parent Alphabet, both of which have been directly linkedwith privacy concerns, now trade at valuations near 52-weeklows.
The overhang of increased government oversight has sunk thefortunes of large technology companies in the past. MicrosoftCorp reached a settlement in an antitrust case with theDepartment of Justice in 2002 that lasted until 2011,contributing to a long period of underperformance that kept thestock below the high it reached in 1999 until 2016. Since then,the stock is up nearly 60 percent on the strength of itscloud-based services.
Margaret Patel, a senior portfolio manager at Wells FargoFunds, said that she has been adding to defense stocks likeRaytheon Co that should benefit from increasing militaryspending in both the
"It's very hard to see another sector that still has all thefundamental drivers for growing much faster than any othersector," she said.
(Reporting by David Randall; Editing by Jennifer Ablan and NickZieminski)
