Can the FAANG stocks keep delivering?

Will the current love for tech stocks keep going? Why not, says Mark Avallone, who argues that while stocks like Amazon and non-FAANG member Tesla may be overvalued, they’re likely to keep paying off for investors for many years to come.

Tech is once again driving the markets, both in Canada where Shopify is powering the TSX and in the United States where on Monday Amazon had its best day since late 2018, Microsoft rose 4.3 per cent and the Nasdaq climbed 2.5 per cent to 10,767. Those gains came on a day when the S&P 500 rose 0.8 per cent to finally return to positive for the year.

The COVID-19 pandemic is a significant factor in tech market dominance, where investors are seeing a paradigm shift in the way business will be conducted here on out.

Together, more work-from-home environments and a bigger percentage of commerce taking place online mean that businesses across the board will have to invest more heavily in their tech infrastructures to accommodate a remote workforce and bricks-and-mortar stores will have to adapt to the realities of e-commerce or fade away in the process.

The upshot for investors is that while FAANG and the other tech names may be overheated at the moment, the broader secular moves are in their favour.

So says Avallone, president of Potomac Wealth Advisors, who spoke on CNBC on Monday, saying the current frothiness is nothing new.

“The tech sector has been where extreme valuations have been ignored and cash flow is going there from investors, but it's also where commerce is going. There is a link that's somewhat justifiable when you look at what you do during the day. You noodle around on Facebook and you're shopping on Amazon and you're searching on Google, and you're still relatively working from home and staying from home, you're pulling up Netflix …it's not a manufactured craze,” Avallone said.

Avallone pointed out that for most investors, their portfolios will likely contain a heavy dose of FAANG and other tech stocks, simply because most ETFs include hardy helpings of those stocks. That makes for a risky position for the markets, whose fate rests in the hands of a small number of high-fliers. That means investors should look to diversify, said Avallone.

“All the ETFs are weighted and including the FAANG names —or FAANG-plus— and the indexes control them, the big mutual funds are buying them, and nobody wants to not be a winner. So all the money managers are participating in it and no matter where you turn you're going to own these stocks. And whether they're six or seven names that are running 25 per cent of the S&P 500, it doesn't seem to matter to investors and the money managers, you almost can't blame them,” Avallone added.

“What I really want investors to do is to be broadly diversified and somehow hold their nose and still invest in some of the value side of the equation,” Avallone argued. “If you're a long term investor if you're nearing retirement, you don't want to say, ‘Well, just because some transports or industrials or medical technology haven't been participating like the sexy FAANG names, I don't want to invest in them until they go up.’ That's not the right way to invest. You want to look at both sides of the equation.”