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If FAANG stocks dwindle, fund managers bet on survivors

NEW YORK (Reuters) – A bear market in the so-called FAANG stocks – Wall Street’s most popular trade going into the year – is pushing fund managers looking for the next big business growth can lead the overall market higher.

FILE PHOTO: A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, New York, USA, 4 December 2018. REUTERS/Brendan McDermid/File Photo/File Photo

The shares of Facebook Inc (FB.O), Amazon.com Inc. (AMZN.O), Apple Inc (AAPL.O), Netflix Inc (NFLX.O), and Google-older Alphabet Inc (GOOGL.O) reached a record high in July.

Since then problems, ranging from Facebook’s data privacy scandals Apple’s falling iPhone sales to Netflix rising cash burn rate have craters of the stocks, helping push the tech-heavy Nasdaq Composite index on the edge of a bear market. The Nasdaq lost 1.7 percent in the afternoon trade Friday.

With shares of the FAANGs an average of 25.6 percent since the beginning of the quarter, fund managers and analysts begin to rethink their approach to growth, the handling of the FAANG inventories less as a single block and more on their individual merits.

“This was a year where at the beginning you had to own the FAANG names and at the end of it you do not want one of them,” said Kevin Landis, portfolio manager for the firsthand Technology Opportunities fund.

Landis, who is trimming his position in Apple still holds Amazon.com and Alphabet among its 10 largest positions, said that the FAANG group is breaking down as the adult businesses and their growth plateaus.

As a result, he is trimming his position in Netflix and instead add to its position in the streaming tv company Roku Inc ROKU.O), which has a market value of about $3.3 billion, compared with Netflix’s market value of $116.3 billion.

“It’s hard to see Netflix grow by an order of magnitude, but it is easy to see Roku grows by an order of magnitude as the cord-cutting trend picks up steam,” he said.

FAANG FUNDAMENTALS

There are still things to like about each FAANG stock, of course. Netflix surprised analysts with its subscriber growth in the most recent quarter, for example, while Facebook is growing rapidly in abroad, and Amazon’s profitability came in higher than Wall Street had predicted.

But each company is also faced with obstacles that belie the idea that they will continue to dominate the equity markets. Netflix, for example, is trying to get back a faster cash burn rate as the cost of content increases, while the revenue growth for Google’s search and YouTube advertising is slowing amid increased competition from Amazon.

Facebook is faced with higher costs and more regulatory pressure, while Apple is struggling with a slower-growing market for smartphones and Amazon is weighed down by higher expenditure costs.

It is a “slow motion train wreck,” said Michael Pachter, analyst at Wedbush Securities.

The steep slide in the stock market will likely be split, and as the popularity of investing in shares of one of trade, he said. “Facebook has almost daily scandals, and Netflix has the impending loss of Disney/Fox content, but the others have really done nothing wrong,” he said.

Tom Plum, portfolio manager of the Plumb Equity fund, said he largely stayed away from the busy FAANG stock trade because of their high valuations. But of the group, he expects that Facebook is the least likely to rebound quickly, the cracking of the group.

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“Companies that depend on social media advertising you’ll see some incredible burden, and I would like to see a few quarters at least to see how they’ve adjusted their business models” for the purchase of the shares, he said.

Instead, he is increasing his position in companies with strong recurring revenue streams, such as Adobe Inc. (ADBE.O), Visa Inc (V. N) and Microsoft Corp (MSFT.O).

“You don’t have to buy companies panic prices, unless there is a panic, and I think that there is an incredible amount of fear in the market at this time,” he said.

Reporting by David Randall; Editing by Jennifer Ablan and Nick Zieminski

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