By Ben Eisen and Akane Otani
Investors rattled by recent volatility are becoming choosier
about which technology-focused stocks they scoop up, a reversal
from 2017 that threatens to undermine the tech sector's dominance
in the long stock rally.
The S&P 500 tech sector, up 1.5% in 2018, is still among the
best-performing groups in the broader index. But more than a third
of the 69 stocks in the sector have declined in 2018, the most for
any full year since 2011. In 2017, only six of them had lost
ground.
The divisions are likely to come into sharper focus as more
tech-focused companies report financial results in the coming days.
With valuations already stretched by traditional measures,
investors are contemplating which companies warrant the higher
multiples that typically come with the tech label. After all,
advanced technology underpins nearly every business, from banking
to manufacturing, investors say.
The moves mark a period of more careful scrutiny among investors
following a year when any name with a Silicon Valley ring to it
seemed to rise -- be they video-streaming services, auto makers or
computer companies. Netflix Inc. rose 55% in 2017, while shares of
Tesla Inc. and Apple Inc. both surged 46%.
Netflix, though lumped into the consumer-discretionary sector,
has climbed 57% this year as its video-streaming service has
continued to post subscriber growth. But Tesla, the electric-car
maker run by Elon Musk that isn't in the S&P 500, is down 9.6%
amid concerns about the pace of production of its new Model 3.
Meanwhile, Apple has fallen 2.6%.
"It's more of a prove-it-to-me market," said Brian Johnson, the
chief investment officer at Viridian Advisors in the Seattle area,
which has roughly $600 million in assets. "We've had tremendous
gains over the last year or two."
Mr. Johnson's firm sold its stake in Tesla last month amid
concerns about Model 3's production pace. He noted that sentiment
around the stock had soured after its remarkable run in 2017. The
firm, however, still holds some big tech stocks.
"A lot of people have trouble defining exactly what these
companies are, " said Dan Roarty, chief investment officer for
thematic and sustainable equities at mutual-fund firm AB. "They
cross a lot of boundaries."
After its run-up in 2017, the S&P 500 tech sector trades at
roughly 31 times its past 12 months of earnings, carrying by far
the highest price/earnings ratio of the 11 sectors in the broad
index. The S&P 500 trades at 22 times trailing earnings.
Rising valuations have made certain areas of the tech sector
look less appealing, investors say, especially given the
possibility that regulators could move to impose tighter rules on
companies ranging from social-media giants to self-driving-car
makers.
Facebook Inc., which had been the fifth-largest S&P 500 firm
by market capitalization earlier this year, tumbled in March as
lawmakers blasted the company's handling of its users' data --
raising fears among investors that firms heavy on data collection
could get hit by stricter regulations.
That is when AB's Mr. Roarty dumped the last of his Facebook
holdings. A basket of big tech stocks that last August made up more
than 11% of his portfolio now makes up about 6%, he said. Shares of
Facebook, which reports quarterly results after markets close, have
fallen 10% this year.
This week, Google parent Alphabet Inc. reported profits for the
first three months of the year that topped expectations, but
investors grappling with the company's higher expenses sent the
shares down 4.7%, its worst session in more than two months.
Twitter shares fell Wednesday after the company warned revenue
growth likely will slow for the remainder of the year.
Other investors have backed off the so-called FANG trade -- a
bet that Facebook, Amazon.com Inc., Netflix and Alphabet will
continue rising in lockstep -- and gravitated toward names that
they feel aren't part of crowded trades.
Thomas Plumb, president of Wisconsin Capital Management, has
grown fond of companies involved in financial transactions --
ranging from household names like Mastercard Inc. to the
Maine-based Wex Inc., which helps trucking companies process
payments. Both stocks are up more than 11% for the year.
Meanwhile, Brian Culpepper, a portfolio manager at James
Investment Research, favors lesser-known companies like Western
Digital Corp., a computer that manufactures data-storing devices,
including hard drives. Shares of Western Digital have climbed 7.9%
in 2018.
"I really worry about the stocks that have run drastically
higher -- the FANG stocks. Those are probably the names that would
be hit the hardest in any decline," Mr. Culpepper said, adding that
he believes there will be a growing divide in hardware-producing
tech companies and social media-oriented tech firms.
This fall, index providers S&P Global and MSCI Inc. will
reclassify Facebook, Alphabet, and some other current tech
constituents as communications companies, lumping them in with the
likes of entertainment company Walt Disney Co. and media
conglomerate CBS Corp. After the changes go into effect, none of
the so-called FANG stocks will be in the tech sector.
That stands to reduce the sales and earnings growth of the
remaining tech sector, potentially reducing its appeal to some
investors, according to Goldman Sachs Group. The sector, which will
still include Apple Inc. and Microsoft Corp., will make up about a
fifth of the S&P index's market cap, down from about 25%
currently.
Write to Ben Eisen at ben.eisen@wsj.com and Akane Otani at
akane.otani@wsj.com
(END) Dow Jones Newswires
April 25, 2018 14:17 ET (18:17 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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