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James Hyerczyk
Facebook

Last Thursday’s “gap and go” sell-off in Facebook was ugly for long investors but it should only serve as a reminder of what could happen to any stock at any time, not just this social media giant. Furthermore, it should not be used as an indicator “of things to come” for the FANG stocks or the entire technology sector.

Sure, it could happen in other technology stocks because investors are loaded up on the long side in these stocks because for years, they have been the best game in town. So far this year, the tech-based NASDAQ Composite is up 12.1%, while the benchmark S&P 500 is up 5.4% and the blue-chip Dow Jones Industrial Average has posted a 3.0% gain.

Every time a revenue and earnings report is posted, investors run the risk that a company will miss on both sides, triggering a mass exit from the stock on profit-taking. Yes, profit-taking, not fresh short selling. That’s why savvy investors diversify their holdings.

Investors in a bull market are constantly looking for value. Some see higher prices in the future and decide to buy now in anticipation of higher prices. Some play for value and prefer to buy dips. With Facebook, investors perceived the stock as overvalued based on future growth projections so they took a little off the top.

The size of the sell-off was obviously a headlines grabber, but you have to look at who was behind the selling. It wasn’t mom and pop investors, nor was it all mutual fund sellers. They may have booked profits when the bad news came out, but the majority of the selling took place during the over hours market and it was primarily dominated by the over-weighted hedge funds.

According to a recent survey by Goldman Sachs, more than 10 percent of hedge funds counted Facebook as a top 10 holding.

The hedge funds were in massive long positions based on first-quarter regulatory filings. This was in contrast to the mutual funds, which have reportedly been trimming their positions in so-called FANG stocks since late 2016, the Goldman report said on Thursday.

In other words, the mutual funds were hit less-hard from the Facebook debacle than the highly speculative hedge funds.


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Contagion Effect?

Firstly, let’s look at the weightings of the FAANG stocks – Facebook, Amazon, Apple, Netflix and Google (Alphabet) – in the NASDAQ Composite Index. Facebook is weighted 4.983 percent, Amazon 10.475 percent, Apple is 11.151 percent, Netflix is 1.834 percent and Google (Alphabet) is 5.134 percent.

It may be top-weighted in Amazon and Apple, but the others seem to be fine. A sell-off equal to Facebook’s move will, therefore, have a greater effect on the index then Thursday’s move in the social media giant. So the 1.06% loss in the index last week was relatively small when compared to, for example, the steep break in February.

Secondly, analysts are now saying that Amazon is beginning to decouple from the FAANGs. Remember that Amazon released earnings the day after Facebook. Although they were mixed, the stock still rose so there goes the contagion argument.

It looks like the contagion argument may be valid for Facebook and Twitter since both sold off sharply last week and they are both social media companies. However, given the history of the social media sub-sector (see AOL and Myspace), this can be a volatile group of stocks. It is truly an “only the strong survive” industry.

In conclusion, I have to say that based on the second-quarter earnings results, the technology sector is fine and should before well the rest of the year even with the “blip” on the chart from Facebook. As of Friday, earnings from more than half of the companies in the S&P 500 Index have reported, and so far 88% beat on earnings while 74% had better-than-expected revenue. Furthermore, technology stocks continue to look good, with 35 of 36 companies beating on the bottom line.

So when it comes to assessing the value of an entire sector, try not to get caught up in the headlines about how money was lost, and the historical size of the crash, keep an eye on the entire sector. Furthermore, if money leaves Facebook, a social media company, it may flow into other stocks in the sector including Microsoft, Apple, Netflix or Amazon.

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