Tech gets wrecked: FANG isn’t going BANG
It’s was a tumultuous week on the NASDAQ, highlighted by the performances of the popular FANG block of Facebook Inc. (FB), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX) which were devastated by Thursday's crash.
Some US$125 billion was erased in market value as investors ran for the exit doors. To put this figure into perspective, FANG’s loss on Thursday is more than the individual worth of 450+ companies in the S&P 500.
The disastrous day of trading was just the latest warning sign that FANG may have lost its shine over the course of 2018, with several pundits predicting a significant correction earlier this year.
One such pundit was Larry McDonald, who is the editor of the Bear Traps Report, a Risk Analysis Investment resource based out of New York.
“These are stocks you want to run away from,” McDonald said on June 30.
“I see potentially 30 to 40 percent downside on the FANGs.
“About US$6 trillion has come into passive management in recent, say, last five to 10 years, and all of that money has gone into the FANG stocks.”
But is Thursday’s tech wreck merely a correction – providing a strong opportunity for investors to buy in?
Traders have since issued numerous theories behind Thursday’s slide, ranging from higher bond yields to the ongoing China-U.S. trade tension surrounding technology, but Alex Bellefluer had a far simpler explanation.
“The FANG stocks have big valuations that are baked in, and they need to justify with continued positive earnings surprises, which investors have been questioning recently,” explained Bellefluer, who is a chief economist and strategist at Mackenzie Financial Corp.
“So you have stocks at high multiples, you have a rally in yields that increases the discount rate at which you discount those future earnings, and you question the level of growth that is baked in. It can hurt a lot and be difficult,” he added.
Gary Bradshaw, who is a portfolio manager at Hodges Capital Management, echoed Bellefluer’s sentiment.
“I have a hard time thinking that tech earnings are going to slow dramatically. What we’re seeing is a normal market correction, and tech is falling more than any other sector because it rose more than anything else.
“The demand for technology is strong.”