In a startling reversal, investors who inflicted nearly $1 trillion in market share losses on the four FANG stocks by abandoning them last fall are now rushing back to own Facebook Inc. (FB), Inc. (AMZN), Netflix Inc. (NFLX) and Google-owner Alphabet Inc. (GOOGL), even as signs of overcrowding threaten to cause a major pullback.

Investors say the outlook for the big techs has turned from bearish to bullish for four primary reasons, including a more dovish Federal Reserve maintaining an environment of low interest rates, the ever-expanding economy, relatively attractive valuations and strong sales forecasts for the tech titans. All of these factors contribute to upbeat expectations that the FANGs, alongside tech peers like Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Alibaba Group Holding Ltd. (BABA), will continue to outpace the market, as outlined in a detailed Wall Street Journal story.

Why Big Tech Is Poised to Rise Higher

  • Dovish Federal Reserve
  • Forecasts for continued economic growth
  • Attractive valuations versus history
  • Strong sales forecasts for techstars
  • Low expectations for Q1

Source: WSJ

'Climate Couldn't Be Any More Different From Last Year'

Over 180 fund managers which collectively oversee $547 billion in assets indicated that the they considered the FANG stocks, and Chinese Internet giants Baidu Inc. (BIDU), Alibaba and Tencent Holdings Ltd., as the second-most crowded trade in the market. Betting against European equities remains the most crowded trade in the space, per Bank of America Merrill Lynch’s April fund-manager survey. On Tuesday, one investor bet $288 million on tech stocks, lifting the $20.1 billion Vanguard Information Technology ETF to its highest level in over three months, per Bloomberg.

While fund managers typically view “overcrowding” as a negative, the market watchers suggest that current conditions leave room for continued momentum. According to a separate BofA report, allocations to FANG stocks for active fund managers remains below levels seen over the past two years.

"The climate couldn’t be any more different from last year,” said Denny Fish, a portfolio manager and co-manager of Janus Henderson’s global technology fund. “Investors are now thinking through a more positive outcome, whether its China or the Fed,” he added. Mr. Fish maintains “significant positions” in Microsoft, Alphabet and Amazon, and is bullish on Netflix, per the WSJ.

Strong Sales and Profit Outlook

Top and bottom line numbers from the FANG group are also set to beat the broader market by a long shot, with Facebook, Alphabet, and Amazon all expected to post sales growth over 20% for the full year. For comparison, the average S&P 500 company is expected to see sales increase by a mere 3%, according to Goldman Sachs Global Investment Research. Meanwhile, as the broader market sees profits squeezed by higher input costs, Facebook is slated to report net profit margins at 34%, compared to the projected 11% across the S&P 500. Alphabet’s net profit margins are expected to inch higher to 23%, while Amazon is forecasted to grow to 8% from 5%.

Ken Allen, a portfolio manager at T Rowe Price’s science and technology fund, argues that in the event of an economic down cycle, the financial performance of the internet companies should be better than others. Allen also cited attractive valuations, with Amazon trading at 60 times estimated future earnings, down from 84 times in September, and Netflix at 89 times versus 95 times.

As for interest rates, a growing number of money managers are expecting the Fed to cut rates by year-end after the central bank said it would halt future increases this year.

“In a low-growth world, growth continues to command a premium,” said Mr. Fish.

In preparation for Q1 reporting season for the techs, bulls say companies like Apple are poised for an upside surprise, per CNBC. Nick Colas, co-head of DataTrek Research, notes that Street estimates have fallen for FANGs, given them a good chance to beat expectations. Apple, for example, is projected to see earnings decline 14% and sales to drop 6%. “That seems like a low enough bar to beat,” he said.

What’s Next

While the FANGs regain their popularity on the Street, not all have jumped aboard. Analysts at Morgan Stanley warn that waning tax cuts could end up crushing software and hardware stocks, per Business Insider. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, writes that falling capex spending is likely to inflict turbulence on many of the same technology firms that were beneficiaries of Trump’s sweeping corporate tax cuts.