Marzee Kerawala is a Certified Financial Planner with expertise in Income Tax and Investment products. Managing assets worth over Rs. 4 Billion, his firm ‘NiveshIndia’, designs Tailored Investment Strategy through Customised Financial Planning for individuals and NRIs, and also handles Treasury Management for Corporates and SMEs. You can contact him at +91 9987567667 or Email: firstname.lastname@example.org [Website is www.niveshindia.in]
Given the number of requests I have been receiving over the past couple of weeks to buy ‘FAANG’ stocks in my investor’s portfolio and my meetings with the representative of the platforms (which facilitate foreign equity transactions), I thought it is appropriate at this juncture to pen down this article. For the uninitiated, ‘FAANG’ is an acronym referring to shares of the five most popular companies and best performing technologies or IT company stocks. Facebook, Amazon, Apple, Netflix and Google (the popular name for Alphabet). The stock prices of these companies, as also most of the listed IT companies, have more than doubled or tripled in the last few months, or simply over a year, on NASDAQ. The resulting hype, hysteria and interest generated in the media and amongst the investors raises concerns if we are again, in a tech bubble.
Between 1995 and 2000 the NASDAQ index rose 400%, peaking at a 200 PE ratio. I distinctly remember the great dotcom bubble of 2000 which ended in the US and its severe repercussions across global markets. It’s worth reminding oneself what had happened then. Once it had peaked in March 2000, the NASDAQ index fell by almost 67% in just the next nine months, bottoming out 78% lower in October 2002! Even in India, Nifty IT and Media indexes fell by over 50% from the peak. Among the largest fifteen companies in the NASDAQ index, back in 2000, only three remain at the top today – Microsoft, Cisco and Intel. It took nearly fourteen years, till 2014-15, for the companies like Microsoft and Cisco to deliver positive returns of 1% – 2% CAGR from their peak levels (March 2000). Back in India, a bellwether IT stock-like Infosys took nearly six years to turn positive.
This effectively means that the investors who bought these bluest of blue-chip companies, the best ones, leaders of their Industry, at the wrong time and at abnormally high valuations back then, had suffered NIL returns for extended periods of time. I don’t mean the lower rung companies like Pentamedia Graphics, Silverline Technologies, DSQ software, etc (all of which I still hold in my Demat account and they are not even worth the yearly Demat maintenance charges I pay @ Rs. 300/-) which, along with their big brothers, had surged sharply… only to get suspended or delisted later.
One should never forget the rule of ‘Regression to the Mean’ when it comes to investing in stock markets. It means any stock, a particular sector or a Mutual Fund scheme, will revert to its mean, and even out over time. Performance that is well above average or well below average usually doesn’t stay there forever. The latest performance has been driven by the mega-cap tech stocks, which are up almost 170% in the last year, similar to what happened during the last tech run-up. In March 2000, at the height of the bubble, 36% of all technology companies were unprofitable. Today this ratio is 33% – the highest it has been since the peak of the bubble.
What is more worrisome is the large media coverage of these ‘FAANG’ stocks and their past year returns. Most of the AMCs have come out with NFOs having foreign equity allocations, highlighting the past performance of these tech stocks. To top it, there’s been a huge surge in so-called Robinhood investors, who seem to know it all as far as trading space is concerned! They simply sit at home and trade at virtually zero cost, as trading costs have plummeted to decadal lows. Clearly, one has to be careful not to get too deeply sucked into this frenzy.
A number of my Indian clients work at Facebook, Google and Amazon – most are in their mid-thirties; they’ve never observed earlier stock market cycles but are super stoked seeing their fortunes soar with these stocks. When they request me to buy another FAANG stock, I explain to them the dangers, as I know most of these employees receive ESOPS and hold their company stock outside of our depository. They need to revisit their combined asset allocation and thereafter, make an informed decision. Moreover, those not working with these companies but want a small pie of it, can easily make up by buying MO Nasdaq ETF available on our exchanges. I personally see no merit in buying these stocks directly, thereby complicating filing of Income Tax returns.
Yes, with Covid-19 pandemic still looming large, many IT companies have sharply improved their growth outlook. But surely, we are trading at elevated levels on all the metrics, and the retail, inexperienced investors interest in these stocks is a red flag for all. In the long run, good companies with sound businesses will do well, but do keep an eye out, in case you are over-paying or holding weaker and speculative companies.