The saying goes that one should quit while one is ahead.
This might hold true for many trades, but there is one for which this should be ignored.
The FANG stocks have returned nearly 30 per cent year-to-date versus 8 per cent for the S&P 500. According to a note from Bank of America Merrill Lynch last week: “active managers continued to double down on tech (with their exposure increasing by +12.6 per cent in the first quarter) along with a 71 per cent overweight in FANG stocks.”
What is more remarkable is that the latter stayed steady over the last year, but the rally in FANGs has been driven by active managers who were once bearish on the trade, throwing in the towel and covering their short positions.
Resistance is futile, it seems.
Yet, the warnings of exuberance have been plentiful. And those warnings are not new. For years we have been reminded of the similarities to the 2000 tech bubble. But this time it’s different. Comparisons to the 2000 tech bubble are ill-placed, as now 17 years later, the companies in question are hugely profitable with strong recurring revenue streams.
These firms have higher market capitalisations than the German DAX index and the French CAC. I would call that impressive leadership.
We have also been warned about the narrow leadership in the S&P thanks to tech, now that the reflation trade is flagging. In my view, the word “narrow” misses the point. These firms have higher market capitalisations than the German DAX index and the French CAC. I would call that impressive leadership. Further, we have we been hearing about of the sky-high valuations of the tech sector for years. Most recently that the price-to-earnings ratio of the US tech sector hit 27, which is deemed outrageously expensive for any other sector.
One of the analysts ignoring the argument of excessive valuations is Cyrus Mewawalla, founder and chief executive at CM Research. Last week, he told me that: “for many aspects of tech, traditional valuations and discounted cash flow models are simply not applicable. Some of these big themes like artificial intelligence, autonomous driving – they don’t exist commercially yet. But we know they are going to be big and we kind of know who is going to lead them. This tech rally has some way to go.”
Even more so, it seems like a few winners will take it all. According to Mewawalla, all of the big themes that are coming out in the next two years are benefitting the big ones far more than the broad tech sector.
Take cloud computing for example, which requires huge investment by the likes of Google, Amazon, IBM, and Microsoft. Similarly, augmented reality or autonomous vehicles requires big data sets, which is why Microsoft bought LinkedIn or why IBM bought Proven Health Analytics.
Mewawalla adds that he has a “buy” rating on all FANG stocks and does not think any of them are overvalued.
Mark Hawtin, investment director at GAM, goes a step further by saying recently on CNBC that the FANG stocks are still cheap despite hitting consecutive record highs, adding Facebook is the cheapest stock in his portfolio on a price-to-growth basis.
The message from the investment community is clear. Follow the leader, follow this rally. It might be frustrating if you haven’t been in it from the start, but it is not too late. This tech rally which has been defying all odds, is here to stay.
Carolin Roth is anchor on CNBC’s Street Signs Europe.