By Michael Wursthorn
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 (April 23, 2019).
Wall Street's FANG gang is growing again.
Big money managers have resumed buying shares of FANG -- which
stands for Facebook Inc., Amazon.com Inc., Netflix Inc. and Google
parent Alphabet Inc. -- and others, as the prospect of low interest
rates and a still-expanding U.S. economy has pushed investors back
into one of the bull market's historically most profitable
trades.
The so-called FANG companies, as well as Apple Inc. and
Microsoft Corp., have gained $916.2 billion in market value so far
this year, nearly recouping the $945 billion in losses those stocks
suffered in a fourth-quarter selloff. Their increase has
contributed heavily to the S&P 500's 16% gain this year.
Unlike last year, when the quick rise of technology and other
growth stocks spooked investors, several now say conditions are
ripe for these companies to run higher.
The shares still have attractive valuations, and the
expectations are that growth at many of those companies will
continue to outpace the broader market -- something investors will
look to confirm when Facebook, Amazon and others report their
results this week.
"The climate couldn't be any more different from last year,"
said Denny Fish, a portfolio manager who co-manages Janus
Henderson's global technology fund. He is bullish on Netflix and
maintains significant positions in Microsoft, Alphabet and
Amazon.
"Investors are now thinking through a more positive outcome,
whether it's China or the Fed," Mr. Fish added, referring to
investors' expectations of a trade deal between the U.S. and China
and the Federal Reserve's more dovish stance on monetary
policy.
That has more fund managers crowding into those stocks. More
than 180 fund managers overseeing roughly $547 billion in assets
said they considered the FANG stocks -- as well as Baidu Inc.,
Alibaba Group Holding Ltd. and Tencent Holdings Ltd. -- the
second-most crowded trade in the market, behind betting against
European equities, according to Bank of America Merrill Lynch's
April fund-manager survey.
Although fund managers usually view overcrowding in tech stocks
as a drawback, some say this year's trade is less congested,
leaving more room for further upside.
Active fund managers, for example, had higher allocations to
FANG stocks last month, compared with the fourth quarter, but those
allocations remained below levels seen over the past two years,
Bank of America said in a separate report.
But not everyone is convinced. Morgan Stanley continues to
suggest that investors limit their exposure to technology and
consumer-discretionary stocks and is neutral on communications --
all sectors where FANG and other fast-growing companies reside.
Instead, analysts at the investment bank urge investors to take a
more defensive position in case economic growth in the U.S.
stalls.
Still, investors say lofty sales-growth estimates for tech
companies are fueling their interest. Facebook, Alphabet and Amazon
are all projected to increase their sales in 2019 by 20% or more,
compared with just 3% for all of the S&P 500 companies,
according to Goldman Sachs Global Investment Research.
Profit margins among those companies also remain relatively fat
at a time when many firms are coping with higher labor costs due to
a robust jobs market and rising material costs.
Facebook's net profit margin for 2019 is expected to come in at
34%, down from 40% a year earlier. But that is higher than the 11%
projected across the S&P 500, Goldman added. Alphabet's is
estimated to inch higher to 23% from 22% last year, while Amazon is
expected to expand to 8% from 5%.
Ken Allen, a portfolio manager who oversees T. Rowe Price's
science and technology fund, says his fund has been focusing more
on internet companies. Over the past three months, the fund has
increased its stake in Facebook, according to data from
FactSet.
"If growth weakened dramatically or there's a recession and the
stock market goes down 15%, my hope would be that financial
performance of the companies we're focused on is better than
others," Mr. Allen said.
Valuations also continue to be reasonable, Mr. Allen added.
Shares of Facebook are trading at nearly 23 times their projected
earnings over the next 12 months, while Alphabet stands at 25
times. Both are roughly where they were in late September, before
the fourth-quarter selloff, and below levels from early 2018,
according to FactSet.
Companies with relatively high multiples appear cheaper than
they have been in the past, with Amazon shares trading at 60 times
estimated future earnings, compared with 84 times in late
September, according to FactSet. Netflix stands at 89 times versus
95 times.
There is also the potential for the Fed to cut interest rates, a
move that would bolster investors' appetite for shares of
fast-growing companies at a time of flagging economic growth,
analysts said. Since the central bank said it would hold off on
further rate increases this year, a growing chorus of money
managers has been predicting a cut by year-end.
"In a low-growth world, growth continues to command a premium,"
said Janus Henderson's Mr. Fish.
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Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
April 23, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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