The five leading stocks identified as the FAANG group have reached the level where they are fully priced, or even overvalued, and investors seeking growth from the technology sector should consider other parts of that market, according to an innovation-focused investment manager.
Perpetual Global Innovation Share Fund portfolio manager Thomas Rice said the FAANG stocks, represented by Facebook, Apple, Amazon, Netflix and Google, had been resilient as a group through the COVID-19 downturn, but their relative performance has varied since the start of the year.
Rice said Facebook and Google were reliant on advertising revenue, but the former had done better because of its ability to substitute content during the COVID-19 downturn.
“Both provided adverts for hotels and holiday accommodation, which dropped away on Google because people stopped searching for those things, but Facebook was able to replace those adverts with other content,” he said.
He said the fund considered Apple to have remained stable since the downturn began in March, but expected it would do more business following the recent announcement of new products, while Netflix and Amazon had benefited from people being restricted to working from home.
“Netflix has seen a record number of new subscribers and Amazon has seen its biggest growth ever as more people turned to e-commerce for their shopping,” he noted.
“We see these stocks as high quality and they dominate the areas they operate in, which is why we think their qualities have been recognised and their share price is fair value or overvalued.”
As a result of this view, he said the fund was currently underweight in regards to the FAANG stocks and United States technology sector and was looking at related fields, including gaming, in Europe and Asia, as well as renewable energy and life science stocks.
“Our view is that innovation is more than just technology and we look to where change is taking place and where stocks are mispriced because they are misunderstood,” he said.
He said investors looking at the wider technology sector should use the same factors to assess an investment as with other markets, but to bear in mind it moves at a faster pace.
“There is still a need to consider what value is on offer, how can it be maintained and how far can a company grow and are its margins sustainable,” he said.
“This has to be consistently assessed and Warren Buffett said he likes to focus on stocks that don’t change, such as Coca-Cola, but technology changes a lot and you have to be prepared to change your view as new information arises.”