By Corrie Driebusch
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 27, 2018).
The past week's 3.8% decline in the Nasdaq Composite Index
hasn't shaken the faith of many investors in technology shares.
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 has instead been buying up more consumer tech shares and selling
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 296 points,
Amazon was down 7.8% and Alphabet was off 1.8%.
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 20% in October, Amazon is down 18% and
Google parent Alphabet has fallen 10%. Year-to-date, though, they
are up 56%, 40% and 2.9%, 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 26% so far this month, while IPG
Photonics is down 14%.
"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 Trust Co., 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 27, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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