FANG stocks are back in favor

Fast-growing tech firms shine after punishing fourth quarter.

  • By Michael Wursthorn,
  • The Wall Street Journal
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Wall Street's FANG gang is growing again.

Big money managers have resumed buying shares of FANG—which stands for Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Google parent Alphabet Inc. (GOOGL) —and others, as the prospect of low interest rates and a still-expanding U.S. economy has pushed investors back into one of the bull market's historically most profitable trades.

The so-called FANG companies, as well as Apple Inc. (AAPL) and Microsoft Corp. (MSFT), have gained $916.2 billion in market value so far this year, nearly recouping the $945 billion in losses those stocks suffered in a fourth-quarter selloff. Their increase has contributed heavily to the S&P 500's (.SPX) 16% gain this year.

Unlike last year, when the quick rise of technology and other growth stocks spooked investors, several now say conditions are ripe for these companies to run higher.

The shares still have attractive valuations, and the expectations are that growth at many of those companies will continue to outpace the broader market—something investors will look to confirm when Facebook, Amazon and others report their results this week.

"The climate couldn't be any more different from last year," said Denny Fish, a portfolio manager who co-manages Janus Henderson's global technology fund. He is bullish on Netflix and maintains significant positions in Microsoft, Alphabet and Amazon.

"Investors are now thinking through a more positive outcome, whether it's China or the Fed," Mr. Fish added, referring to investors' expectations of a trade deal between the U.S. and China and the Federal Reserve's more dovish stance on monetary policy.

That has more fund managers crowding into those stocks. More than 180 fund managers overseeing roughly $547 billion in assets said they considered the FANG stocks—as well as Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. —the second-most crowded trade in the market, behind betting against European equities, according to Bank of America Merrill Lynch's April fund-manager survey.

Although fund managers usually view overcrowding in tech stocks as a drawback, some say this year's trade is less congested, leaving more room for further upside.

Active fund managers, for example, had higher allocations to FANG stocks last month, compared with the fourth quarter, but those allocations remained below levels seen over the past two years, Bank of America said in a separate report.

But not everyone is convinced. Morgan Stanley continues to suggest that investors limit their exposure to technology and consumer-discretionary stocks and is neutral on communications—all sectors where FANG and other fast-growing companies reside. Instead, analysts at the investment bank urge investors to take a more defensive position in case economic growth in the U.S. stalls.

Still, investors say lofty sales-growth estimates for tech companies are fueling their interest. Facebook, Alphabet and Amazon are all projected to increase their sales in 2019 by 20% or more, compared with just 3% for all of the S&P 500 companies, according to Goldman Sachs Global Investment Research.

Profit margins among those companies also remain relatively fat at a time when many firms are coping with higher labor costs due to a robust jobs market and rising material costs.

Facebook's net profit margin for 2019 is expected to come in at 34%, down from 40% a year earlier. But that is higher than the 11% projected across the S&P 500, Goldman added. Alphabet's is estimated to inch higher to 23% from 22% last year, while Amazon is expected to expand to 8% from 5%.

Ken Allen, a portfolio manager who oversees T. Rowe Price's science and technology fund, says his fund has been focusing more on internet companies. Over the past three months, the fund has increased its stake in Facebook, according to data from FactSet.

"If growth weakened dramatically or there's a recession and the stock market goes down 15%, my hope would be that financial performance of the companies we're focused on is better than others," Mr. Allen said.

Valuations also continue to be reasonable, Mr. Allen added. Shares of Facebook are trading at nearly 23 times their projected earnings over the next 12 months, while Alphabet stands at 25 times. Both are roughly where they were in late September, before the fourth-quarter selloff, and below levels from early 2018, according to FactSet.

Companies with relatively high multiples appear cheaper than they have been in the past, with Amazon shares trading at 60 times estimated future earnings, compared with 84 times in late September, according to FactSet. Netflix stands at 89 times versus 95 times.

There is also the potential for the Fed to cut interest rates, a move that would bolster investors' appetite for shares of fast-growing companies at a time of flagging economic growth, analysts said. Since the central bank said it would hold off on further rate increases this year, a growing chorus of money managers has been predicting a cut by year-end.

"In a low-growth world, growth continues to command a premium," said Janus Henderson's Mr. Fish.

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