{"id":7839,"date":"2018-11-25T19:17:38","date_gmt":"2018-11-25T19:17:38","guid":{"rendered":"http:\/\/zackspcg.com\/blog\/?p=7839"},"modified":"2022-02-26T13:07:25","modified_gmt":"2022-02-26T13:07:25","slug":"are-faang-stocks-a-bubble-waiting-to-burst","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/are-faang-stocks-a-bubble-waiting-to-burst\/","title":{"rendered":"Are FAANG Stocks a Bubble Waiting to Burst?"},"content":{"rendered":"<p>Technology stocks have felt a bigger impact from the recent downside volatility than the broad market (S&amp;P 500). In the last three months through Wednesday (11\/21), the S&amp;P had declined -3.21% while the Nasdaq had fallen nearly twice that, at -6.9%.<sup>1<\/sup><\/p>\n<p>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.<\/p>\n<p>But I\u2019m not convinced just yet that technology stocks in aggregate are overvalued or in bubble territory. The key point I\u2019d 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\u2019t give you the full picture.<\/p>\n<hr \/>\n<p><a href=\"http:\/\/go.steadyinvestor.com\/zacks-blog-stock-market-outlook?medium=zim_website_blog_leads&amp;content=stock_market_outlook_report\"><strong>Economic Indicators You Should Keep an Eye On!<\/strong><\/a><\/p>\n<p>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!<\/p>\n<p>To help you do this, we are offering all readers a look into our just-released\u00a0<strong>Stock Market Outlook report.<\/strong><\/p>\n<p>This report will provide you with our forecasts along with additional factors to consider:<\/p>\n<ul>\n<li><em>What sectors\u00a0<\/em><em>show the best opportunity?<\/em><\/li>\n<li><em>What industries within those sectors most merit your attention?<\/em><\/li>\n<li><em>What produces U.S. optimismin the coming year?\u00a0<\/em><\/li>\n<li><em>Year-end forecast for the S&amp;P<\/em><\/li>\n<li><em>Small-cap vs. large-cap returns<\/em><\/li>\n<li><em>And much more.\u00a0<\/em><\/li>\n<\/ul>\n<p>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!<\/p>\n<p><a href=\"http:\/\/go.steadyinvestor.com\/zacks-blog-stock-market-outlook?medium=zim_website_blog_leads&amp;content=stock_market_outlook_report\"><strong>IT&#8217;S FREE. Download the Just-Released Stock Market Outlook<sup>2\u00a0<\/sup><\/strong><\/a><\/p>\n<hr \/>\n<p>If you have concentrated positions in just a few companies like the ones mentioned above, I\u2019d agree you might want to reconsider your positioning now. But if you\u2019re broadly invested in technology, I wouldn\u2019t be so worried.<\/p>\n<p>Here are 4 reasons why.<\/p>\n<p><strong>1. Tech Sector Valuations are Average Relative to History \u2013\u00a0<\/strong>as of Q3, the tech sector was trading at roughly 29x earnings,<sup>3<\/sup>\u00a0which 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\u2019re more established businesses and are not as common.<sup>4<\/sup><\/p>\n<p><strong>2.\u00a0Tech Valuations Relative to the S&amp;P 500 are also Reasonable \u2013\u00a0<\/strong>during the late 90\u2019s in the run-up to the tech bubble bursting, the tech sector traded between at a 1.5\u20132x premium to the S&amp;P 500. But currently, it\u2019s closer to 1\u20131.25x.<sup>5\u00a0<\/sup><\/p>\n<p><strong>3.\u00a0Technology Companies are Still Profitable on Balance, and Solid Balance Sheets Provide Flexibility \u2013\u00a0<\/strong>tech companies hit an almost 90% earnings beat rate in the second quarter, and it seems likely to eclipse 90% in Q3.<sup>6<\/sup>\u00a0Balance 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.<sup>7<\/sup><\/p>\n<p><strong>4.\u00a0Innovation is Ongoing \u2013\u00a0<\/strong>it\u2019s difficult to fathom that Facebook was founded less than 15 years ago but is now valued around $400 billion.<sup>8<\/sup>\u00a0A similar story applies to Google, Facebook, Netflix, and others. We\u2019re continually seeing innovation in the technology sector, and I\u2019m 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\u2014and always aware of the competition.<\/p>\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n<p>Tech stocks have been disproportionately affected during spells of downside volatility recently, but it\u2019s important to see these steeper drops in perspective. Through Wednesday, November 21, the Nasdaq\u00a0<em>was still better off for the year<\/em>\u00a0than the S&amp;P 500, having risen 6.0% versus the S&amp;P 500\u2019s 4.11% gain.<sup>9<\/sup><\/p>\n<p>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 \u2013 an outcome I would expect this time around as well.<\/p>\n<p>In the meantime, I recommend keeping an eye on economic data releases, earnings reports, and other key economic factors. Our\u00a0<a href=\"http:\/\/go.steadyinvestor.com\/zacks-blog-stock-market-outlook?medium=zim_website_blog_leads&amp;content=stock_market_outlook_report\"><strong><u>Just-Released\u00a0 Stock Market Outlook Report<\/u><\/strong><\/a>\u00a0will give you insight into just that!<\/p>\n<p>This Report is packed with our newly revised predictions as 2018 ends and 2019 gets rolling. For example, you&#8217;ll discover Zacks\u2019 view on:<\/p>\n<ul>\n<li><em>Should you stay bullish?<\/em><\/li>\n<li><em>What sectors does\u00a0<\/em><em>Zacks Industry Ranks show the best opportunity?<\/em><\/li>\n<li><em>What industries within those sectors most merit your attention?<\/em><\/li>\n<li><em>Year-end forecast for the S&amp;P<\/em><\/li>\n<li><em>Small-cap vs. large-cap returns<\/em><\/li>\n<li><em>Our view on the odds for a recession in 2019<\/em><\/li>\n<li><em>And much more\u2026<\/em><\/li>\n<\/ul>\n<p>If you have $500,000 or more to invest, get your portfolio better prepared for 2019 by reading this new report today.<\/p>\n<p><a href=\"http:\/\/go.steadyinvestor.com\/zacks-blog-stock-market-outlook?medium=zim_website_blog_leads&amp;content=stock_market_outlook_report\"><strong>FREE Download \u2013 Zacks&#8217; Stock Market Outlook<sup>10<\/sup><\/strong><\/a><strong>\u00a0<\/strong><a href=\"http:\/\/go.steadyinvestor.com\/download-zim-stock-market-outlook-report?medium=motm_2018_11_25_zim&amp;term=2018_11_25&amp;content=stock_market_outlook_report\"><strong>&gt;<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Technology stocks have felt a bigger impact from the recent downside volatility than the broad market (S&amp;P 500). In the [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-7839","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7839","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=7839"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7839\/revisions"}],"predecessor-version":[{"id":10810,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7839\/revisions\/10810"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=7839"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=7839"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=7839"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}