By Caitlin McCabe
The FANG trade hasn't lost its bite.
Big technology stocks are again charging to new heights and
propelling the broader stock market, which is swiftly rebounding
after a punishing selloff.
The NYSE FANG+ index -- which comprises Facebook Inc.,
Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc.,
along with Apple Inc., Twitter Inc., Tesla Inc., Nvidia Corp. and
Chinese behemoths Alibaba Group Holding Ltd. and Baidu Inc. -- is
up 11% year-to-date after a dramatic rally last week.
The four FANG stocks added $251 billion in market value last
week, their biggest gain on record dating to Facebook's 2012
initial public offering. The S&P 500, in comparison, is down
11% in 2020 but has rallied 16% over the past two weeks.
The big tech stocks "are like chicken noodle soup," said Mike
Larson, a senior analyst for Weiss Ratings. "They are the old
reliable and old standby for portfolio managers...Nobody is going
to get fired for adding Apple stock in a downturn like this."
The returns for big tech companies have helped answer, at least
for now, a question that has long swirled: How would the
deep-seated market leaders fare in a downturn? Many analysts and
investors worried that an eventual market rout could extinguish the
FANG trade's flame, pulling the broader market down with it.
The four companies, along with Apple and Microsoft Corp.,
together accounted for roughly 20% of the S&P 500's value in
mid-February, giving them outsize influence on the market's
direction.
Their resiliency during the coronavirus pandemic underscores
investors' faith that they have enough momentum to continue
powering the market rebound.
After driving much of the historic 11-year bull run that ended
in March -- Amazon's share price, for example, has swelled 3,826%
since March 2009 -- the tech companies now face one of their
biggest tests yet. Although investors and analysts have suggested
that global stay-at-home orders have been a boon for the tech
firms, their coming earnings reports will begin to reveal the true
damage from coronavirus.
The results will also likely give clues about which of the
companies are best positioned to emerge stronger.
Investors are already betting on the continued success of
Netflix and Amazon, whose shares have recently broken away from the
pack and set records last week. Both stocks have risen more than
28% this year and are among the best performers in the S&P
500.
Shares of graphics chip maker Nvidia are also getting a big
bounce, up 24% in 2020, thanks to videogame demand. And Tesla is in
the midst of a 10-session winning streak, extending its gains for
the year to 80%, as investors bet on the future of electric
vehicles and the vision of CEO Elon Musk.
Tesla, along with other momentum stocks, was hit hard during the
market rout, losing more than 60% of its value in a month after a
meteoric rally to start the year. Investors betting on momentum
typically buy shares of companies that have risen the most in the
past 12 months, counting on their continued outperformance.
The FANG stocks held up better than other momentum shares during
the selloff. Amazon, for one, fell 23% from its February high to
its March low. In recent years, momentum bets have often included
tech and other growth stocks, which typically look expensive
compared with the broader market but offer higher-than-average
profit growth.
Institutional investors were among those who remained loyal to
the big tech stocks during the selloff. Amazon, Microsoft, Facebook
and Alphabet sat atop the list of stocks in which hedge funds had
invested the most money as of March 17, according to an RBC
analysis of S&P 500 companies. Netflix and Apple ranked in the
top 12.
And even in the weeks since, few investors are betting against
the stocks. Short interest in Amazon hovered at 1.1% as of April
13, unchanged from a year earlier, according to Goldman Sachs
Investment Research.
Some analysts say they expect many of the big tech companies to
emerge from the pandemic stronger, in part, because of the
potential for permanent behavioral changes in its wake. With
consumers shopping online, consuming in-home entertainment and
communicating via the internet more often, "it's very hard for me
to imagine a scenario where the S&P 500 recovers and Google and
Facebook would not," said RBC Capital Markets analyst Mark
Mahaney.
Netflix will be the first of the group to test that theory when
it reports results Tuesday. The streaming platform's profit is
projected to more than double from a year earlier, while the
companies in the S&P 500 as a whole are projected to post a 14%
drop in earnings, according to FactSet.
Facebook, Alphabet and Microsoft are also expected to post
higher earnings, while profits at Amazon and Apple are expected to
decline modestly.
Despite the tech giants' recent outperformance, Mr. Larson, the
Weiss analyst, cautions that they are vulnerable in a recession --
even though their balance sheets remain strong.
Facebook has already said its recent uptick in usage won't
protect it from digital advertising declines. Google is expected to
face the same problem. Meanwhile, demand for Apple products may
fall as unemployment rises, and Amazon could continue to face
staffing issues and stretched infrastructure.
"These aren't in my mind, safety names, and in some ways they
are still being treated that way," Mr. Larson said.
"In past bear markets, you tend to have a change in leadership
-- the stocks that led you into a bear market weren't the kinds
that led you out," he said. "Could I tell you off the top of my
head what will ultimately lead us out of this? The crystal ball is
a little foggy there."
Write to Caitlin McCabe at caitlin.mccabe@wsj.com
(END) Dow Jones Newswires
April 20, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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