Mitch on the Markets

November 25th, 2018

Are FAANG Stocks a Bubble Waiting to Burst?

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Technology stocks have felt a bigger impact from the recent downside volatility than the broad market (S&P 500). In the last three months through Wednesday (11/21), the S&P had declined -3.21% while the Nasdaq had fallen nearly twice that, at -6.9%.1

These relative declines have investors worried that tech stocks are too overvalued, and that by extension tech names could be adding a layer of vulnerability to the broader market.

But I’m not convinced just yet that technology stocks in aggregate are overvalued or in bubble territory. The key point I’d make is that often times investors are conflating the valuations of companies like Facebook, Amazon, Netflix (FAANG stocks) with the broader technology sector. But doing so doesn’t give you the full picture.


Economic Indicators You Should Keep an Eye On!

I suggest avoiding the urge to get caught up in day-to-day movements or the hype surrounding a specific security, category or companies like FAANG stocks, and instead focus on economic data releases, earnings reports, and other economic factors!

To help you do this, we are offering all readers a look into our just-released Stock Market Outlook report.

This report will provide you with our forecasts along with additional factors to consider:

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

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If you have concentrated positions in just a few companies like the ones mentioned above, I’d agree you might want to reconsider your positioning now. But if you’re broadly invested in technology, I wouldn’t be so worried.

Here are 4 reasons why.

1. Tech Sector Valuations are Average Relative to History – as of Q3, the tech sector was trading at roughly 29x earnings,3 which is pretty close to in-line with the long-term average of 28x. During the tech bubble in the late 90s into 2000, valuations were approaching 70x with several companies trading well above 100x times earnings. Those types of companies exist today, but they’re more established businesses and are not as common.4

2. Tech Valuations Relative to the S&P 500 are also Reasonable – during the late 90’s in the run-up to the tech bubble bursting, the tech sector traded between at a 1.5–2x premium to the S&P 500. But currently, it’s closer to 1–1.25x.

3. Technology Companies are Still Profitable on Balance, and Solid Balance Sheets Provide Flexibility – tech companies hit an almost 90% earnings beat rate in the second quarter, and it seems likely to eclipse 90% in Q3.6 Balance sheets are largely in good shape across the board as well, with large cash balances and relatively low debt. This gives tech companies cushion and flexibility as macroeconomic conditions change. They could choose to increase capital expenditures, become more aggressive in pursuing mergers and acquisitions or even increase dividend payments and share buybacks.7

4. Innovation is Ongoing – it’s difficult to fathom that Facebook was founded less than 15 years ago but is now valued around $400 billion.8 A similar story applies to Google, Facebook, Netflix, and others. We’re continually seeing innovation in the technology sector, and I’m not sure it would be very wise to bet that this innovation goes away any time soon. Technology is likely to continue to bring new efficiencies, new products, and over time, new companies. But this constant stream of innovation also means that investors must be vigilant when choosing companies—and always aware of the competition.

Bottom Line for Investors

Tech stocks have been disproportionately affected during spells of downside volatility recently, but it’s important to see these steeper drops in perspective. Through Wednesday, November 21, the Nasdaq was still better off for the year than the S&P 500, having risen 6.0% versus the S&P 500’s 4.11% gain.9

I would also add that often, the areas of the market that are hurt the most during downdrafts also tend to bounce back the strongest when the market recovers – an outcome I would expect this time around as well.

In the meantime, I recommend keeping an eye on economic data releases, earnings reports, and other key economic factors. Our Just-Released  Stock Market Outlook Report will give you insight into just that!

This Report is packed with our newly revised predictions as 2018 ends and 2019 gets rolling. For example, you’ll discover Zacks’ view on:

If you have $500,000 or more to invest, get your portfolio better prepared for 2019 by reading this new report today.

FREE Download – Zacks’ Stock Market Outlook10 >

Disclosure

1 Google Finance, November 16, 2018.
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 CSI Market, November 16, 2018. https://csimarket.com/Industry/Industry_Valuation.php?s=1000
4 BlackRock, June 13, 2018, https://www.blackrockblog.com/2018/06/13/tech-bubble-fears/
5 BlackRock, June 13, 2018, https://www.blackrockblog.com/2018/06/13/tech-bubble-fears/
6 FactSet, November 16, 2018, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_111618.pdf
7 Charles Schwab, November 16, 2018. https://www.schwab.com/resource-center/insights/content/information-technology-sector
8 Google Finance, November 16, 2018.
9 Google Finance, November 16, 2018.
10 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

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