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Investment Ideas Wall Street eyes earnings stabilizer after FAANG stocks wobble

Wall Street is hoping that first-quarter earnings growth and corporate forecasts are strong enough to bring the FAANG group of stocks back into favour and take the spotlight off worries that caused the recent sell-off in the high-flying group.

With valuations below recent peaks, the group – comprised of Facebook, Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. – could get some relief if the companies beat, or at least meet, Wall Street estimates.

Shares in the group, which led the S&P 500 to record highs in January, often trade together. They were pummeled late in the quarter on worries about a data privacy scandal at Facebook and U.S. President Donald Trump’s public criticism of Amazon.com. On top of this, fears of a trade war with China escalated during the quarter.

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For the group, analysts expect average first-quarter year-over-year earnings growth of 25.8 per cent, up from 12.4 per cent growth in the fourth quarter and a 12.8 per cent increase a year ago, according to Thomson Reuters data.

“All we’re getting now is negative news ... once we start to see the numbers, you’re going to see a bigger spotlight on the success these companies are having,” said Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, which holds shares in the FAANG stocks.

Morgan says he is in a wait-and-see mode until after the first report from Netflix, which is due to be issued on Monday. Analysts expect Netflix earnings growth of 59 per cent and revenue growth of 39 per cent, according to Thomson Reuters data.

The entire group was hurt by fears that Facebook and other internet firms including Google would face onerous regulations or slowing advertising revenue growth after Facebook said nearly 87 million of its members’ personal data was improperly leaked.

Facebook fell almost 24 per cent below its early February record to hit US$149.02 on March 26, its lowest point since July last year, due to the scandal. Google had fallen almost 18 per cent below its late January record by March 28.

Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia said the $76-million Chase Growth fund cut its Facebook investments to 1.8 per cent from 3.1 per cent of its portfolio due to the scandal. Tuz may stay on the sidelines until there is more clarity on Facebook’s prospects.

“If fundamentals remain strong with usage staying strong and the company doesn’t get hit with any severe fines or regulations we might very well buy again,” said Tuz, whose firm also owns Amazon.com, Apple and Google shares.

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“We feel good about three out of the five FAANGs – Amazon, Apple, Google,” he said.

Amazon.com stock was hurt by criticism from U.S. President Donald Trump, who said he would take a serious look at what he claimed were the online retailer’s unfair advantages with taxes and shipping rates. It fell 16.3 per cent between March 13 and April 4.

The broader technology sector was also hammered by fears of a trade war with China, a big source of revenue. Apple derived about 20 per cent of its revenue from China in its fiscal year 2017. Investors seek details how big the financial risks are in the face of events such as a trade war, new regulations or a stronger dollar.

“The guidance will be more important,” said Robert Phipps, a director at Per Stirling Capital Management in Austin, referring to comments on quarterly conference calls about the potential financial impact of all these issues.

But Patrick Palfrey, equity Strategist at Credit-Suisse in New York is mainly focused on strong estimates for the sector, which has posted impressive growth “time and time again.”

“I can’t help but look at the group and have a positive outlook even with the current uncertainties,” Palfrey said.

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Fund flow data shows investors were warming up to the sector again. Science and technology funds showed inflows of US$152-million on the week ending April 11 after outflows of US$610.9-million the previous week, which had marked the first weekly retreat since early February, according to Thomson Reuters Lipper data.

Facebook has risen about 11 per cent from its most recent low while Google has climbed 5 per cent above its recent trough; Apple is roughly 6 per cent higher than its early April low, as is Amazon.com. Netflix has gained about 15 per cent in the last 7 sessions.

Options trading flows suggest that much of the fear of the recent sell-off has faded. But while bears have been exiting positions, bulls have yet to make a big move into the space.

Open options contracts on key sector exchange-traded funds, PowerShares QQQ Trust and Technology Select Sector SPDR Fund, show investor preferences for puts at or close to multi-month lows, according to Trade Alert data. Put options give investors the right to sell shares at a certain price in the future and are often used as a hedge.

“Investors have been buying the dip a little bit, but in very small sizes, without very large conviction, until they see the earnings,” said Ilya Feygin, senior strategist at WallachBeth Capital LLC, in Jersey City, N.J.

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