How to Play the Coming 'FANG Flu'

 | Jun 29, 2017 | 4:30 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:












Thursday's pullback and huge spike in volatility (the VIX has risen nearly 50%) remind us that there still are sellers out there. I even learned a new phrase while reading market coverage: "FANG Flu."

Now, it's easy to overreact to one day's trading action, and I'd caution you not to do so. However, there are broad trends forming in the markets.

For example, I wrote two weeks ago about the nascent group rotation away from the tech titans. That's what I'm predicting for the third quarter -- more choppiness and more days like Thursday, with continued bouts of FANG Flu.

The way to protect yourself against a rotation out of tech is obviously to sell your tech positions (or at least parts of them). After all, you don't have to have as much gray hair as I do to remember what happened in the summer of 2000.

When I was writing my column two weeks ago, I went back and read news reports from the original "Tech Wreck" in the summer of 2000. What's striking looking back to those days is the lack of a single catalyst for the tech selloff.

It wasn't an earnings miss from a then-bellwether like Cisco (CSCO) or Yahoo (YHOO) , nor was it an implosion of a name with horrible fundamentals, like No, it was an orderly rotation out of a sector whose valuation Wall Street couldn't justified by any analytic method. Valuations were just too damn high.

If that feels familiar, it is because that's exactly where we are again today, with the S&P 500's price-to-earnings ratio at a 13-year high. Individual Nasdaq stocks are trading at ridiculous multiples and groups like semiconductors were until Thursday's pullback trading at inflated multiples vs. historical averages.

The semiconductor industry is heavily cyclical, and anyone valuing those stocks as secular-growth plays due to flimsy conceptions like the role of artificial intelligence is making the most fundamental mistake in equity investing -- thinking "this time is different."

As a cub analyst, I was taught that the four most expensive words on Wall Street were "This time is different." It's not different now. It never is.

So, that's what I'm looking for as we move through the summer. Not a tech wreck, but an orderly transition out of names that are trading at 100 P/Es or higher.

For example, Amazon (AMZN) was trading at 148x the last time I ran the numbers, while Tesla (TSLA) has no "E," so its P/E is incalculable. I expect money to rotate out of those stocks and into names that are trading at multiples that aren't so astronomical.

Where to Invest Instead
Bonds remain an attractive safe haven, and I continue to find values down the capital structure in preferred stocks. (Consider my two Real Money "Best Long Ideas" stocks -- Navios G Shares (NM-G) and Frontier Communications Preferred A Shares (FTRPR) .)

In terms of market sectors, energy is really the only one that's not expensive relative to historical levels. However, energy stocks' volatility can be challenging (to say the least).

I'll have a few specific names for you in my next column to give you a headstart on what I believe will be a rough third quarter for stocks. After six months of "Buy! Buy! Buy!" hysteria, it's important to protect yourself against what I see as a coming seller's market for stocks.

Columnist Conversations

As far as TSLA is concerned, I still have a higher target above the market at the 409 area.  I stated in ...
The TLT setup discussed in my last commentary is a bust. Key support was violated and it violated the recent l...
BBY is getting smoked this mornings(weak forecast).  The stock is off 8% after opening the session with a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.