For years, the group — which consists of Facebook, Amazon, Netflix, and Google— seemed like an unstoppable freight train incapable of weakness. Investors hungry for returns piled in to already crowded positions, desperate for the outsize returns, regardless of valuation.
But, like all good things, that reign of utter dominance has seemingly come to an end.
The first signs of duress for mega-cap tech hit Facebook in July, when shares dropped 24% in a single day after the company warned of a significant growth slowdown. That was followed by a similar announcement in early January 2019, when Apple said sales growth would be weaker than expected.
This new vulnerability has caught the attention of Don Townswick, the director of equities portfolio management at the $135 billion investment firm Conning. He says the so-called FAANGM group — which includes the usual FANG suspects, plus Apple and Microsoft— will no longer be the market-leading force it once was. So he’s looking elsewhere.
But before we get into the areas Townswick says will make up the new stock-market elite, it’s important to understand why he’s turning his back on the recently re-rated FAANGM group.
Put simply, Townswick thinks the torrid pace of growth those companies enjoyed for so long was unsustainable. He notes that they were often growing by more than 30% on a year-over-year basis at a time when other companies struggled to expand revenue at all.
“When growth is scarce, people will buy it even if it’s expensive,” Townswick said. “It was always a question of not when but if that revenue growth would slow down.”
So which areas of the market should investors consider buying instead? Here are Townswick’s picks. All quotes attributable to him.
“We look at the fact that we think economic growth is still going to be relatively strong compared to the last decade or so. We’re forecasting a 2.6% GDP growth rate for 2019. With that growth still strong, we think the consumer can remain strong. Consumer discretionary stocks could be a place where we could see some strength.”
“There could be two phenomena here. One is the ongoing businesses healthcare firms have. But also it appears that the large drug companies are finding smaller biotech companies to purchase, which could give that sector a spark.”
Tech, but outside FAANGM
“We have seen some strength on the technology front, but it really hasn’t been the FAANGM stocks really. It’s been in the relatively smaller tech stocks.”
“The rotation out of the six FAANGM stocks that had really gotten their valuations pretty stretched on many fronts has favored other technology stocks with more attractive multiples. This will also play out in some consumer-related stocks eventually.”