Tech stocks: Don’t fear the FANGs

12 Jun 2018

Stretched valuations and negative publicity hitting some of the largest names in tech mmight concern some investors, but this is no time to
switch off from the sector.

2017 was a good year for the behemoth darlings of the technology sector. Their value soared 50%, but it was a different story in the opening three months of 2018.

Valuations became overly frothy in the first quarter while Facebook, Tesla and Amazon were hit by negative publicity. The soothsayers came out in force predicting that the sector was on the edge of a precipice, but analysts advised investors to stay calm, carry on and be much more discerning.

A flag was raised in March when the so called ‘popular-to-panned ratio’ triggered behaviour reminiscent of activity before the dotcom collapse in 2001. The metric, which was developed in the aftermath of the crash by Jim Paulsen of investment manager Leuthold, measures the price performance of extremely popular growth stocks versus conservative, defensive stocks.

In this case, the market was looking at staid utilities, which from 3 December 2017 until 12 March 2018 significantly underperformed the S&P 500 information technology (IT) sector by 30% and the Fang (Facebook, Amazon, Netflix and Google) index by 46.5%.

The direction of travel then turned sharply in the first quarter when the benefits of US tax reforms had been priced in and concerns were raised over the financial stability of some of the Goliaths who had come under fire. This included Facebook’s data scandal, Donald Trump’s incessant tweets over Amazon’s dominance and Tesla’s fatal Model X crash.

This pushed utilities 11% above the S&P 500 IT and 16% higher than the Fang+ index, which marked the biggest reverse in the ratio since 2001’s TMT (telecommunications, media and technology) crash.

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