FAANG stocks are due for a fall, Norman Levine says

The FAANG group of companies may be driving market gains these days, even as their valuations look more and more absurd, but for value investors like Norman Levine of the Portfolio Management Corp, history dictates that at some point, the glamour will fade on the likes of Facebook, Amazon, Apple, Netflix and Alphabet.

His advice? Enjoy the fun while you can because the end won’t be pretty.

In the continuing debate between value and growth investing, the latest victory would have to go to growth, whose prime candidates are the FAANG stocks. Overpriced and overhyped they may be, there’s little doubt that the FAANG tech stocks, even with their pullbacks earlier this year and continued worries over impending regulation, are a dominant force in the market. The five stocks now make up over 11 per cent of the S&P 500 Index, twice as much as they did just five years ago. So far this year, about half of the gains on the S&P are due to FAANG alone.

But inflated P/E ratios aside, it’s ultimately a matter of when, not if, these stocks will start tumbling, says Levine, managing director at Portfolio Management, who spoke to BNN Bloomberg.

“We’re value investors and for the most part with the exception of possibly Apple, these are not value stocks at all,” Levine says. “These are growth stocks, momentum stocks, and they’ve been great places to make a lot of money and they may continue to do that for a while here, but at some point, they get overvalued significantly, hiccups happen, markets decide that they want to move in some other direction and, historically, they then become not so good places to be.”

“Keep in mind, if you go back in history, when groups of stocks have done exceedingly well, be it the Nifty Fifty stocks in the 60s and 70s, the dot-com stocks in the 90s and into the 2000s — you look back over history and how many of these companies ten, 20, 30, even 40 years later are market leaders or even exist anymore? Very few of them, actually,” he says.

The FAANG stocks were mixed in their latest earnings reports, with Facebook and Netflix disappointing shareholders over slowing growth, while Apple, Amazon and Alphabet all saw their share prices jump after strong quarterly results.

“In the near term, as long as you understand the risks of overstaying your welcome, you’re going to be making money in there,” says Levine. “Enjoy them now. They may or may not be the leaders in the future.”

Disclosure: Cantech’s Nick Waddell owns shares of Amazon