Friday, June 9, 2017

"FANG Stocks Slammed After Goldman Warns Of 'Valuation Air-Pocket'"

That's the headline at ZeroHedge. I prefer something more tabloidy, maybe "Nasdaq Rocked, Mo-mo's Shocked".
Or something.
From ZH:

FANG Stocks Slammed After Goldman Warns Of "Valuation Air-Pocket"
Update: FANG Stocks are getting hammered today.
The fascination with the influence of a handful of giant tech stocks on the overall markets continued overnight, when one day after Bank of America found that the tech sector is now the "most overweight it has ever been", surpassing even the record clustering into tech during the dot com bubble, Goldman issued a report looking at the outsized influence of the five tech stocks in question which it dubs FAAMG – Facebook, Amazon, Apple, Microsoft and Alphabet, which have collectively added a total of $600 bn of market cap this year, "or the equivalent GDP of Hong Kong and South Africa combined."
This is also the group of names which we reported last month is what virtually every brand name hedge fund purchased in the first quarter based on 13F filings, as active managers abandoned "value" names and factors and rushed into "momentum" and "growth."

Looking at this cluster of tech names, Goldman's Robert Bouroujerdi writes that "while FANG has dominated investor focus, the nature of the acronym has expanded more broadly to encompass mega-cap tech. Indeed, the bigger story in our view is FAAMG – Facebook, Amazon, Apple, Microsoft and Alphabet – a group of five stocks which have been the key drivers of both the SPX & NDX returns year-to date. This outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives (e.g. FAAMG’s realized volatility is now below that of Staples and Utilities)."

The run in large-cap tech stocks (with the top 5 accounting for a stunning 55% of the Nasdaq's YTD gains) has evoked memories (nightmares?) for some investors of the last euphoric NASDAQ run.

Below Goldman lays out some of the unintended portfolio consequences that have resulted from everyone rushing into this biggest every hedge (and mutual) fund hotel ever:
  • Ownership. Per our US Portfolio Strategy team, all five stocks are currently in the top 10 of the Hedge Fund VIP basket with Facebook, Amazon and Alphabet holding the top 3 spots. Mutual funds across Core, Growth and Value are also overweight all but Apple and the five names combined are 11.8% of holdings vs. a blended benchmark of 11.2%.
  • FAAMG through the Factor Lens: A strong relationship with our Investment Profile (IP) Growth and Momentum factors should come as no surprise, but FAAMG also increasingly trades like Low Vol. Indeed, FAAMG’s correlation over the last 5 years to Growth, Volatility and Momentum sits in the 92%, 90% and 96th%ile. Further Momentum as a factor, in isolation, has built a valuation bubble underneath it not seen since ‘Factormageddon’ of last year.
  • Realized Volatility (6m) for FAAMG has fallen over the last year and is currently not only below that of the average stock in the S&P 500 but is also below the average Consumer Staples & Utilities stock ignoring any potential cyclical, regulatory (e.g. antitrust, online activity) or tech disruption risk.
  • Like many other asset classes, FAAMG is cueing off 10-year bond yields, but not in the direction you might expect. Post the election, correlation turned negative, which is more analogous to a bond proxy/yield sector such as Staples or Utilities.
  • Within the NDX, Biotech is the largest non-Tech sector (now 8%). While the space tends to be positively correlated to Tech and secular growth, it has recently turned negative.
And here Goldman issues a warning for the factor investors: "driven by the rise of mega-tech,Momentum, as a factor, has built a valuation air pocket underneath it creating cause for pause."

See also yesterday's "Signposts: "Goldman Sachs Mulls the Death of Value Investing"".
I was thinking of putting a post together on how the momentum stocks that have been up are the ones that are up today, Tesla up 10 bucks, NVIDIA up 10.75, etc. when this story was brought to my attention....
Today the Nasdaq composite is down 102.29 (-1.62%) at 6,219.48 while the megacap Nasdaq 100 is off 128.35 (-2.18%) to 5,756.95.

Amazon is down $29.01 (2.87%) to $981.26; Google down $30.78 (-3.13%) at $952.63; Apple down $6.08 (3.92%) at $148.91 while the two mo-mo's I mentioned yesterday, Tesla off $11.90 (3.22%) and NVIDIA down $13.74 (8.59%) are definitely right in there.