Amazon, Facebook, Netflix and Google are predicted to have a rough year in the stock market.Mike Segar/Reuters
As if investors don't have enough to worry about in this gut-churning year, some experts are already warning that they could be de-FANGed.
The "FANGs" – otherwise known as Facebook, Amazon, Netflix and Google – have been consistently reliable even in the face of market volatility that began in 2015.
That may change for the worse this year, says Thane Stenner, Vancouver-based director for wealth management and portfolio manager at StennerZohny Investment Partners, part of Richardson GMP Ltd. "The FANGs will make a major move lower and contribute heavily to a U.S. bear market," predicts Mr. Stenner.
"In 2015, the FANGs were the only thing keeping face about the S&P 500, and they likely need to be sanded or ground down to molars this year," he adds.
He thinks their decline is likely, perhaps inevitable, even though it has little or nothing to do with the quality of these companies or their leadership in innovation.
"Over the long term they will likely reinvent themselves and endure," he maintains.
For each of these companies, this kind of shape-shifting has already happened a few times. Netflix has morphed from a DVD mail service to streaming video to a major entertainment producer. Amazon has moved from an e-bookstore to an online purveyor of everything, and is experimenting with drone delivery. Facebook is consistently expanding its business lines, and Google (which last year changed its official name to Alphabet) is experimenting with wearable technology and driverless cars.
Anthony Boright has similar thoughts. The president of InvestorCOM.com, which provides technology to firms in the financial sector, says, "I lived through the dot.com-to-dot-bomb days from the 1990s to the early 2000s, so I can see why there's growing concern about the tech sector being a little too frothy."
Both experts say the issue for investors is not so much frothiness, however.
The four companies "have different markets, audiences and pricing strategies, and they're capitalizing on the emergence of social media, subscription models, cocooning – all those areas have made them successful," Mr. Boright says.
But amid current market upheaval, even strong performers will likely be buffeted, Mr. Stenner says.
Some analysts see these highly successful companies as "bubble" investments.
Forbes magazine's Antoine Gara noted last November, for example, that many investors "have been hiding from a correction in many corners of the stock market" by buying the FANGs, which were up between 35 and 157 per cent in 2015, compared to an overall rise in the S&P 500 last year of less than 2 per cent.
While it's unlikely that these robust companies will go the way of Pets.com, Napster or other casualties of the millennial tech bust, they could nevertheless curl downward if the market is indeed into a correction, he said.
This year investors have been looking over their shoulders for a potential correction, signalling that predictions of a FANG downturn may be prophetic. Netflix shares, for instance, hit a high of $133 in December and have since dropped to less than $100.
Mr. Stenner thinks the FANGs are all in a similar situation: Investors (and the markets) have over-relied on them to lift indexes in a lackluster 2015 and now, as the four stocks dip, more and more will be seeking to sell.
From their highs in 2015, the FANGS could decline by 30 to 40 per cent, he says, though this may move upward to only a 5 or 10 per cent year-over-year decline by the end of 2016, "depending on market conditions … bailouts, oil geopolitics and the like," he says.
When markets correct, they correct in tandem, and correlations move closer," he adds. "The FANGs are now playing catchup to the losses of the rest of the index."
"Investors often think in terms of long-term diversification to mitigate portfolio risk; however, bear markets tend to shift most asset classes in the same direction. The diversifying effect won't protect you from broad market moves."