GOOG Alphabet Inc

By Corrie Driebusch 

When clients call Steven Dudash and ask the Chicago-based financial adviser to sell shares of Amazon.com Inc. and Netflix Inc., he responds this way: "No. I'm going to buy you more."

Mr. Dudash, whose IHT Wealth Management manages $3 billion, said he instead proposes to sell some of clients' bonds and real-estate stocks, which he views as having poor prospects as interest rates rise. Those decisions feel scary and potentially painful now but will pay off when the current scare has passed, he assures them.

"To me, this screams go buy everything you can," he said.

An October stock rout is placing investors like Mr. Dudash at a crossroads, and the path they choose will have a significant impact on the market's course in coming months. On Friday, sellers were out in force yet again in the wake of soft revenue figures from Amazon and Alphabet Inc. The Dow industrials were down more than 300 points, Amazon was down 8% and Alphabet was off 3%.

It is the latest installment of what has become a near daily drama this autumn: the tech stocks that powered outsize gains earlier this year are falling fast while higher interest rates and fears of slowing global growth have dented the shares of companies dependent on trade.

This week's selloff has wiped out once-robust year-to-date gains for the Dow Jones Industrial Average and the S&P 500.

For now, many investors' faith in tech shares seems largely unshaken despite the declines. Interviews with half a dozen portfolio managers indicate none are selling hot shares, though some have expressed concern about the market environment and signs that demand for products such as semiconductors is softening.

Making the choice especially difficult is the fact that while losses have been severe, shares in many cases are still sporting gains. Netflix has dropped 19% in October, Amazon is down 17% and Google parent Alphabet has fallen 11%. Year-to-date, though, they are up 59%, 41% and 1.4%, respectively.

Some are waiting for the storm, which has hammered tech shares of all descriptions, to pass. Jason Tauber, a portfolio manager for Neuberger Berman's Disrupters All-Cap Growth strategy, has held on to shares of Cognex Corp., which makes vision sensors used by global manufacturers including those in China, and IPG Photonics Corp., which also sells its lasers to Chinese customers. Cognex's shares have slumped roughly 25% so far this month, while IPG Photonics is down 15%.

"It's been painful," he said.

Although these companies have been hit by a slowdown in Chinese industrial orders, due in part to tariffs, Mr. Tauber said he still believes in their ability to boost sales. "I don't think this is going to spark a global recession," he said, a belief that is keeping him from what he refers to as panicked selling.

Mr. Tauber added that "it does seem like this is an opportunity to buy some of these tech companies," though so far he hasn't made additional purchases.

Ed Cofrancesco, chief executive of International Assets Advisory LLC, an Orlando, Fla.-based brokerage firm that manages more than $2.5 billion, said some investors are cutting back on growth and momentum stock while favoring financials and utilities stocks and bonds.

"All clients, regardless of portfolio composition, have been expressing anxiety and nervousness," Mr. Cofrancesco said.

Jim Callinan, portfolio manager at Osterweis Capital Management in San Francisco, said he unloaded his stake in two tech companies he deemed "lower quality." Due to their debt and leverage, he said he worried about their prospects in a rising interest-rate environment. He also said he took advantage of the tech selloff to get back into a stock he sold earlier this year. He wouldn't name the shares, citing his firm's compliance policies.

The market's decline hasn't completely surprised him, as he said he felt a correction has been overdue.

"Some of these companies had gone up to outrageous levels," he said.

Dan Morgan, a portfolio manager at Synovus, is watching the volatility from the sidelines. "Six months ago, you couldn't go wrong in tech," he said. "It didn't matter what you picked, it went up. Obviously now you need to be more discerning."

His positions in tech behemoths such as Amazon, Apple and Google parent Alphabet are down this month, but he said he hasn't seen shifts in consumer demand for iPhones or changes in terms of projections for advertising compared with a month ago. Furthermore, he said he has owned Apple stock since 2005. The stock is up more than 2,000% since the end of 2005, which puts the recent 4.4% October decline in context, he added.

Moreover, earnings from the biggest companies have generally been positive, even if the market hasn't always taken kindly to them. Netflix and Amazon, for example, have reported robust profit growth this year.

More concerning to Mr. Morgan are comments about softening demand from executives at chip makers. Semiconductor stocks as measured by the PHLX Semiconductor Index are down 15% since the start of October. For the year, the index has underperformed the rest of the tech sector, slumping 7.5% compared with the Nasdaq's 3.9% gain.

"Chip stocks are the plankton of tech stocks," said Mr. Morgan. For now, Mr. Morgan said it is "still too early to hit the panic button, but obviously there are warnings out there."

----Michael Wursthorn contributed to this article.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

(END) Dow Jones Newswires

October 26, 2018 11:59 ET (15:59 GMT)

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