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Point/Counterpoint: The Case for FAANG Stocks

Stock MarketsJun 27, 2020 06:59AM ET
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By Peter Nurse and Yasin Ebrahim

Investing.com -- The FAANG stocks have had a good coronavirus crisis, but investors should start thinking about whether these gains can continue. Peter Nurse argues that the group is behaving like the dotcom's in 1999, before the bursting of that first internet bubble. Yasin Ebrahim makes the case that the group offers investors a chance to buy the dip amid fears of a second wave of coronavirus lockdowns. This is Point/Counterpoint.

The Bear Case

While the U.S. economy has struggled to recover from the mass unemployment and output collapse caused by the social distancing measures used to combat the virus, Wall Street has bounced back strongly from the initial crash, powered by all-powerful tech stocks.

Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), or the so-called Fab 5, making up 40% of the Nasdaq Composite Index, have shown to be big winners when the world goes into lockdown.

Facebook, Amazon, Apple and Netflix (NASDAQ:NFLX) have all hit record highs this month, while Google owner Alphabet isn't far removed.

These stocks now have a combined market capitalization of over $4.7 trillion, meaning the market cap of the Nasdaq Composite is concentrated in the five largest stocks to a degree not witnessed since the peak of the Tech bubble at the turn of the century.

“The market has favoured these companies and they have been flavour of the month since the Covid pandemic erupted,” said Zehrid Osmani at Legg Mason affiliate Martin Currie. “The risk now is that these obvious beneficiaries of lockdown have been bid up a lot, and now it’s a question of what is in the price going forward.”

And they are starting to look expensive.

For example, Netflix is currently trading on a price/earnings ratio of around 94, which compares with 78.35 at the end of last year when the Covid-19 outbreak was not a consideration in any investors’ thought process. Amazon’s current P/E stands around 131, versus 80.31; Apple above 28, versus 23.20 and so on.

These companies are also all now facing a number of pressing fundamental issues.

Amazon and Google face the hard stare of regulatory scrutiny for possible anti-competitive business practices. Netflix is competing with a number of new rivals in streaming video as well as having to cope with the extremely expensive business of producing new content.

European competition officials have already announced investigations into both Apple’s App Store and its payment platform, Apple Pay, while the U.S. Department of Justice has long been rumoured to be on the verge of doing something similar.

Facebook and Google have already had to cope with a sharp drop in advertising spending during the coronavirus pandemic, and are going to have to compete with the major broadcasters for likely reduced advertising budgets going forward.

The Wall Street Journal reported last week that U.S. advertising spending is expected to plunge by 13% this year, according to research from GroupM, a unit of advertising giant WPP (LON:WPP) PLC. It was only in December it was forecasting U.S. ad spending would rise by 4% in 2020.

The social media companies, including Facebook, have drawn the ire of President Donald Trump, who signed an executive order to roll back their legal protections after accusing them of trying to silence conservative voices.

On the flip side, Verizon (NYSE:VZ) announced Thursday it was pulling its advertising from Facebook, the biggest name so far in a growing movement to boycott the social network for not doing enough to stop hate speech on its platforms.

On top of this, Facebook and Google have been criticized for lack of data privacy and security.

Despite their valuations increasing during the crisis, the profits at the tech giants have actually fallen along with the rest of the market, said Societe Generale’s ultra-bear Albert Edwards in a research note late last month, and unless a cyclical recovery is on the cards this is set to continue.

“I personally suspect that this recession will ultimately expose these and the tech sector to be far more cyclical than appreciated. And it will be difficult in that environment to maintain their 32x forward PE,” Edwards added.

The Bull Case: Second Wave Fears a Second Chance to Buy the Dip

 
The bloody end to the week for the broader market may have tempted some to suggest the time has come to hoist the white flag on tech, but on closer inspection the swing lower will likely favor those willing to buy the dip.
 
The tech-heavy Nasdaq has rallied about 42% since hitting its March low, and with the end of the second quarter fast approaching, it is not unreasonable to suggest the move lower this week was sparked by profit taking.
 
"We could see some profit taking in the last four days in the last week of quarter ... historically, strong quarters showed weaker than average performance, heading into that final week of the quarter," Paul Hickey, co-founder of Bespoke Investment Group told CNBC in an interview.
 
In the event of a possible dip, "we would be using that opportunity to buy names and add exposure," Hickey added.
 
The move lower in tech, however, did coincide with a daily record surge in coronavirus cases, which admittedly, has stirred the cocktail of uncertainty, but has hardly shaken the fundamental reason to stay loyal to tech: growth. 
 
The collective group of mega cap tech rode the wave of higher demand for products, and services that support online commerce and keep businesses operating during the pandemic.
 
With rising infections rekindling fears that lockdown could unleash the sort of economic savagery that recently brought global economies to a grinding halt, the 'Fab 5' could likely prove as good a place as any in the equity market to seek refuge ahead of a potential second wave.
 
"Mega tech stocks... are interestingly now viewed as defensive plays," Kirk Hartman, president and global chief investment officer at Wells Fargo Asset Management, told Bloomberg in an interview earlier this week.
 
Boasting "pretty certain cash flows," in a near-zero percent interest rate, mega tech stock are being discounted at a very low level, Hartman added.
Point/Counterpoint: The Case for FAANG Stocks
 

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Comments (12)
Jason Bacon
Jason Bacon Jun 28, 2020 8:13AM ET
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When FAANG corrects it will be deep. Unless you can find a 'greater fool' to buy from you at a higher price these stocks dont pay you to own them. When they start downwards there is no dividend silver lining. Speculation leads to... well it leads to what is going to happen shortly.
Braden Betts
Braden Betts Jun 28, 2020 3:18AM ET
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You wrote Microsoft when explaining the FAANG acronym
Googleinc Alphabetinc
Googleinc Alphabetinc Jun 27, 2020 11:55PM ET
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Aaron Daniel Kaaron
paul guzman
paul guzman Jun 27, 2020 7:41PM ET
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se vienen los osos esta semana...
Erkki Mäntylä
Erkki Mäntylä Jun 27, 2020 1:24PM ET
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Is the really realistic that Faang is going down ?
BiG DaDDy CK
BiG DaDDy CK Jun 27, 2020 12:57PM ET
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>33% of the Aristacrat funds dividend paying stocks will be reducng their dividends in July and although QQQ/TQQQ are inflated the composite will overtake the dow30 before the end of 2022. Tech will gobble up the beaten down blue chips. Best of Luck!!
mashhour turk
mashhour turk Jun 27, 2020 12:12PM ET
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Hey guys , i would love to have some fang , but ill not be the stupied ine to buy at those prices , even the 10th wave of virus will not change mu mind in this regard , relasticly , high market caps like fang shouldnt surge 40% due to a virus threat!!!! , they are fomo’ing in right now so i expect a drop back ti the 7800 to 7500 mark after reading this article , the money i didnt make going up with the index , ill sure make it when it os going down
Tom Jones
Tom Jones Jun 27, 2020 12:12PM ET
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This article is comparing tech bubble valuations which were based on many companies with zero revenues with FAANG cos, which have changed the way we live and have massive boards of cash. Two completely different animals. Think about how we would have communicated and entertained ourselves during Covid without these megacaps. Right, we wouldn’t have. When will be the next time you go to the movies?
Aye Chan Tha Zan
Aye Chan Tha Zan Jun 27, 2020 12:06PM ET
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Maung Maung Khaing
Jay West
Jay West Jun 27, 2020 10:04AM ET
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People buying these stocks at this point are illogical. I sold Apple @ 290, and I cant believe it has continued to head to the moon. Insanity!
Tom Jones
Tom Jones Jun 27, 2020 10:04AM ET
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What did you invest in with the money you received from selling AAPL? Reopening trade stocks?
John Patrick
John Patrick Jun 27, 2020 10:02AM ET
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You'd think FANG stocks are the only thing that matters in the markets. What about the other 98% of US businesses who are struggling or filing for bankruptcy . FANG companies are doing well so they are being used as the phony storefront for politicians and bankers to fool investors that markets are healthy and strong. The lemmings are being led over the cliff!
Elvis Durant
Elvis Durant Jun 27, 2020 10:02AM ET
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exactly. I said this a few says ago. Market only worries about 5 stocks while the remaining 495 of the s&p are under water. good luck to that
jonathan seagull
jonathan seagull Jun 27, 2020 10:02AM ET
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Elvis Durant because they are irrelevant
Bret Lafrance
Bret Lafrance Jun 27, 2020 9:43AM ET
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Falec - this is a setup article - the banks have been colluding with the “tech” stocks to jack up the market for as long as they haven’t been able to use their own stocks for that purpose and the CEO’s of those companies havd been living in a dream and that’s coming to an end now that banks can deal in their ownnstocks again, or will be able to shortly. Sell fang, buy banks because their valuations are about to go througb the roof. I bet that you are going to see some big tech names retiring in the next few months...
jonathan seagull
jonathan seagull Jun 27, 2020 9:43AM ET
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Crazy. What did fed say lately to banks?
Tom Jones
Tom Jones Jun 27, 2020 9:43AM ET
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Zero interest rates, lower dividends and higher loan default reserves will weigh on bank stocks for the foreseeable future. It’s nice to know the mindset of the people who I’m taking money from.
Fabio falec
falec Jun 27, 2020 8:17AM ET
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Hickey, Hartman and Fed (indirectly) to buy these assets and inflate, once again, the tech bubble. I AM OUT!
Tom Jones
Tom Jones Jun 27, 2020 8:17AM ET
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What are you buying? Hopefully GLD and not the reopening trade stocks and banks, which are currently value traps.
 
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