By David Randall
NEW YORK (Reuters) – Fund managers have begun to ditch so-called FANG stocks that powered the U.S. stock market to record highs in January and are slowly rotating into commodity-related shares and other value stocks which typically outperform in late-cycle recoveries.
Portfolio managers holding shares of Facebook Inc
On Tuesday, an index which tracks the FANG stocks along with six other mega-cap technology stocks tumbled 6.3 percent, the biggest decline since September 2014.
Facebook rose as much as 1.5 percent in early trading Wednesday before falling into the red, one day after sources told Reuters that chief executive Mark Zuckerberg plans to testify before Congress. Amazon.com dropped 4 percent, while Netflix fell 5 percent. Google-parent Alphabet was slightly positive.
“There are legitimate concerns over the business models of these companies, and I expect that they will be ironed out in legislation” that will likely eat into their profit margins, said Michael Cuggino, a portfolio manager of the $17-billion Permanent Portfolio funds.
Cuggino, who would not say whether he was selling any of his shares in Facebook, said that commodity and industrial stocks look more attractive now given rising inflation and continued global economic growth.
Each FANG company rose more than 33 percent last year, helping power the S&P 500 <.SPX> to a nearly 20-percent gain. Yet those gains have left the broad S&P 500 trading at a high trailing price-to-earnings ratio of 21.7, leaving it overpriced despite a boost to margins from the Republican-led corporate tax cut at the end of 2017.
“Rising volatility and changing market leadership are now pointing towards the possible conclusion that the stock market peaked in late January 2018,” said Douglas Kass, president of Seabreeze Capital Management.
The S&P 500 is now down 2.2 percent for the year, and down nearly 10 percent below the high of 2872.87 it reached on Jan. 26.
UNFRIENDED
Fund managers say that the high valuation of FANG stocks and the likelihood of regulation are pushing them into traditional value stocks like energy and defense companies.
Connor Browne, a portfolio manager at Thornburg Investment Management, said that he sold his shares of Netflix and Amazon.com last year after both companies blew through his price targets. He used those gains instead to increase positions in energy stocks such as pipeline operator Enterprise Products Partners LP
“We noticed that in all of this excitement over the FANGs taking over the world, there are parts of the economy that seem really out of favor and offer more compelling opportunities,” he said.
Even after the selloff, FANG stocks continue to trade at higher valuations than the broad market. Netflix trades at a P/E of 210 and Amazon.com trades at a P/E of 327. Facebook and Google-parent Alphabet, both of which have been directly linked with privacy concerns, now trade at valuations near 52-week lows.
The overhang of increased government oversight has sunk the fortunes of large technology companies in the past. Microsoft Corp
Margaret Patel, a senior portfolio manager at Wells Fargo Funds, said that she has been adding to defense stocks like Raytheon Co
“It’s very hard to see another sector that still has all the fundamental drivers for growing much faster than any other sector,” she said.
(Reporting by David Randall; Editing by Jennifer Ablan and Nick Zieminski)