US tech stocks saw big falls recently. Is it a pause as investors “rotate”, or the start of something bigger? Ben Judge reports.
The big tech companies have had a spectacular run this year. Between the start of the year and 8 June, shares in Facebook, Apple, Amazon, Microsoft and Google’s parent Alphabet had gained an average of 30%, says Liam Proud on Breakingviews. Despite making up just 13% of the S&P 500, these five companies were responsible for more than a third of the index’s gains. Added together, their market cap rose by $663bn.
The big tech firms have come to be known as FANG in recent years (Facebook, Amazon, Netflix, Google; Netflix’s smaller market cap means it is now often considered separately.) Last Friday a report from Goldman Sachs titled “Is FANG Mispriced?” and one from UBS headlined “Is Tech about to be de-FANGed?” asked if they were overvalued – and sent the sector plummeting. “The notes put the market on edge,” says Nicholas Jasinski on Barron’s. “Panicked investors did the rest.”
The high valuations had raised fears that investors had been “rushing into tech stocks… in what could be a replay of the late 1990s bubble”, says Stephen Gandel on Bloomberg Gadfly. It also reinforced worries about passive investing, which has the effect of concentrating money in the same stocks: “the ones that are rising the most”. Thanks to the spread of passive investing, “retail investors now own 60% to 70% of these stocks”, says Landon Thomas Jr in The New York Times – “an exposure of very large amounts of money to a small selection of stocks that investment specialists say is unprecedented”.
But fears of a meltdown are overdone, says Bloomberg’s Gandel. “Compared with 1999, technology stocks actually occupy a significantly smaller portion of many investors’ portfolios.” And after the slide, the proportion will have shrunk further. Initial losses prompted trading algorithms “to rotate out of the tech sector en masse”. Another is that investors were “locking in hefty gains”.
Tech stocks are considered growth stocks, says Jasinski. Investors aren’t after dividend income; they buy them because they expect capital gains. But the Goldman report raised “the possibility that investors have been confusing momentum and growth”. For the FANGs, “momentum has taken over – now fundamental growth may need some time to catch up”. But neither Goldman nor UBS believe we’re in a bubble. Both compared current conditions to the tech bubble of the 1990s. The market is healthier today, with shares “cheaper based on price to earnings, cash balances, cash flow, and more”.
GE’s “terrible CEO” bows out
After 16 years in charge of industrial conglomerate General Electric (GE), CEO Jeffrey Immelt is to step down. The share price jumped by 4% when the news was announced last Monday. Immelt is to be replaced by long-serving GE executive John Flannery, who currently runs the healthcare division. He will take up his post in August. Flannery will now be “counted on to revive the company’s languishing stock price”, says Julie Creswell in The New York Times. Good luck with that, says Tomi Kilgore on MarketWatch.
Of all the companies that remain in the Dow Jones index since Immelt took over, “GE’s stock has been by far the worst performer, and one of only two that have declined”, he says. GE’s share price fell by almost 30% during his tenure, and is down by over 11% so far this year.
His departure is no surprise – GE has been planning for his succession for years. But by going now, with “a looming let-down on earnings” and “many years of share-price underperformance”, Immelt is “leaving under a cloud”, says Ed Crooks in the Financial Times.
He was forever under a cloud, says Adam Hartung on Forbes.com – he was simply “a terrible CEO”. A widely cited excuse is that GE had diversified into financial services before the 2008 crash, but that won’t wash; JPMorgan Chase has managed to recover since then, after all – while GE’s future remains in doubt.
• In 2005, when easyJet CEO Carolyn McCall was chief executive of Guardian Media Group, the paper moved from a broadsheet to the mid-sized Berliner format. McCall spent £80m on new printing presses, “despite concerns that the distinctive size meant the presses were highly unlikely to pick up external printing contracts”, says Alexandra Frean in The Times. She also spent an additional £60m to terminate an existing print contract with Richard Desmond, plus £20m for new insertion machines.
Now, The Guardian is finally to go tabloid in a bid to save money. McCall’s decision-making is likely to be called into question, and pressure on her is likely to rise, “not least from Sir Stelios Haji-Ioannou, the easyJet founder and her arch-critic”, who has been “highly critical” of some of her more expensive decisions.
• The market “sure does lurve Boohoo.com, online seller of ‘bustier mesh skirt bodysuit dresses’ for millennials”, says Kate Burgess in the FT. Its shares have risen more than fourfold since floating three years ago, and last week it raised £50m in new shares to fund expansion. Margins are “an ASOS-beating 10%”, notes Burgess, and it “turns over its stock six times a year”. But expansion will test it. And, “if tested too far, investors will be as quick to move on as any fashion-conscious teen”.
• “Companies are a little lazy about what they put into regulatory filings,” says Justin Lahart in The Wall Street Journal. And investors “are profoundly lazy about reading them”. The language in quarterly and annual corporate reports rarely changes. But when it does, “investors should sit up and notice”. Recent research covering filings between 1994 and 2014 has shown that shares in companies that made significant changes to their wording “did much worse than those of companies that didn’t”.