Tech Wolves in Sheep's Clothing Still Have Teeth

Google, Facebook, and Amazon have an ingrained image as growth stocks that deliver great long-term performance but tend to be pricey.

Yet these behemoths and some other big tech names now have lower prices, enabling them to make a rare appearance on the other side of the growth/value dichotomy and to pass through risk-oriented screens that are normally biased against them.

These screens, which favor stocks with relatively few negatives regarding valuation, performance and investor sentiment, tend to reveal companies that will likely have higher returns because of lower risk in these areas. As these screens have an inherent bias toward value, they tend to discriminate against big tech, but now that prices are down, some big tech names are passing through. These companies are still posting good revenue and earnings, making them particularly attractive now.

Some tech names--like Apple, Intel and Cisco Systems--might normally be expected to shift into the value category. However, some more volatile tech stocks are now making this cut. These include Texas Instruments, PayPal, Broadcom, and Google. In the communications service’s subsector, Sirius XM and Yelp join Facebook on the other side of the screens. And in the consumer discretionary category, Booking Holdings joins Amazon as being lower risk. This is remarkable, considering that in the last four or five years, you’d be hard-pressed to identify a period when such companies made it through lower-downside-risk screens.

The likely reasons for this new style box status are exogenous factors affecting market perception, pushing down prices while surface revenues and earnings have continued to grow. This combination of characteristics has given these stocks value characteristics for the first time in years, or perhaps, ever.

As of October 1^st, Facebook shares were trading at $38 (17%) off their 52-week high, hit in mid-summer; Amazon shares, $299 (14%) off their 52-week high, hit around the same time; and shares of Google’s parent company, Google (Alphabet), $47 (4%) off the near high in mid-summer. This hasn’t been a downtrend, but a stall of their perennial yet halting upward climb, albeit with occasional dips.

What’s depressing the prices of these and other tech companies that have long been squarely in the growth category? Likely factors include:

• Widespread recession. The flattening and inversion of the yield curve in the last year has led to an irrational fear of recession. Though recent inversion and general flattening haven’t resulted in recession, the pessimistically faithful hang on to that belief like grim death—despite the assessments of many prominent economists and analysts that recession probably isn’t in the cards for 2019 or probably even for 2020. And never mind that many of those on recession watch in 2018 were focusing on the wrong curve, that key factors that preceded the last six recessions (i.e., rising oil prices and the Fed’s raising interest rates to fight inflation) aren’t present, or that moving rates no longer have a big impact on the likelihood of recession. To the extent that some yield curves might be considered predictive, this, too, is now a false indicator because of fundamental changes in the way the Fed manages monetary policy, which started in 2008, explains First Trust Portfolios economist Brian Westbury. As far as retail investing is concerned, talking heads who confuse recessions with bear markets add to fear and market volatility. Adding to the general financial necromania is the widespread assumption that, corrections aside, the unusual length of this bull market is somehow indicative of a near-term crash. But there’s no objective basis for this thinking.
• Market fears of the performance impact of government regulation on both sides of the pond. The European Union has taken antitrust actions against Google and slapped Facebook with privacy-protection strictures, while in the U.S., congressmen from both political parties’ grumble about regulating these two companies, and potentially Amazon as well. Congressionally mandated divestiture poses risks for Facebook, with its ownership of Instagram and WhatsApp, and Google, whose companies include YouTube, Android, and DoubleClick. If this happens, it would be years off, as the companies can easily spend billions on lawyers to fight it so they can keep operating as they currently do. And even if Congress manages to make a case that Google’s search-engine-for hire is a monopoly (actually, other sites are free to compete with it), how could/would they possibly break it up? After all, it’s one, huge entity. Nevertheless, these headlines doubtless have affected prices.
• Concerns over the trade war with China, which shows no signs of abating. High volatility from alternating signals of resolution and intransigence from inscrutable leaders on both sides of the Pacific have hammered indexes and with them, Facebook, Google, and Amazon.

Though Amazon shares have languished for the last fifteen months, the stock has been characterized over more than a decade by periodic steep upward spurts to new highs. Languish, spurt, languish has often been the pattern. The performance of Google and Facebook has followed a similar pattern. With this history, it’s only logical to consider whether the new value status could be setting up another spurt.

This seems fairly likely for Facebook and Google, whose coffers are destined to swell over the 14 months from election advertising. And during this period, the national addiction to Amazon’s one-click ordering and two-day Prime delivery isn’t likely to abate.

Whether the growth-to-value trend will broaden, and how long it will continue, is unclear. But its continuation might presage a redefinition of the value category. Regardless, these three giants’ robust sales and earnings can now be had for lower prices that seem itching to rise.