Are there any lessons from the markets of the late 1990s that we can apply to 2017?
Investors have fallen in love with the so-called FAANG stocks – tech giants Facebook, Amazon, Apple, Netflix and Google. On the surface, this brings to mind the tech bubble of the late 1990s. Naturally, some market participants wonder whether the FAANG stocks could be vulnerable to a similar fate as the overvalued tech stocks of the late 1990s – a long list that includes doomed names like Pets.com, Webvan.com, and Kozmo.com. Each of these companies enjoyed rapid surges in value only to come crashing down once the tech bubble burst in 2001.
We’re also now in the midst of the second-longest bull market on record, which brings to mind stocks’ extended rally nearly two decades ago. How should investors approach a market environment where valuations are already near record highs and stocks continue to climb?
We discussed these topics on a recent episode of the OppenheimerFunds World Financial Podcast, and brought on Mani Govil, Oppenheimer Main Street Team Leader to get answers to these questions – and more.
Here are some highlights from our conversation.
Brian Levitt, Senior Investment Strategist: What can we learn from the 1990s that we can apply to this market? The question we keep getting from investors is, ‘when is the shoe going to drop?’
PM Mani Govil: First thing – the fundamentals don’t change. The way of researching for good companies for long-term investments still does not change. You still have to meet with the companies, their competitors, suppliers and customers. You still have to think about how the ecosystem for a company can change. You still have to think about where value creation will come from as well as valuation. This doesn’t change – it stands the test of time.
What changes is the speed with which information is translated into the marketplace. We live in a day and age of social media. Artificial intelligence is becoming big. The speed with which insights are transmitted into the markets will be even faster in the future than it is now. That’s what you have to adapt to.
Levitt: There’s an interesting correlation between now and the 1990s – an elongated bull market and an environment where valuations continue to trend upward. How do you respond to that?
Govil: There are definitely many similarities between the 1990s and now. Disruptive models were big then. Stock prices of those companies appreciated quite a bit, which brings to mind the FAANG companies. They have generally disruptive models and have done fairly well. We also had the dotcom boom in the 1990s – but that’s where the similarities end. The models for those companies were far weaker in my view. In general, they weren’t profitable. In fact – a far majority—over 90 percent of the companies at that time did not have profits, and had some silly valuation parameters. These FAANG companies currently have good revenues. They have good business models and profits in my view. They’re earning cash, and their incremental returns are fairly high at the moment, although past performance does not guarantee future results.
They are completely different from the dotcoms. Maybe you can draw some similarities in terms of stock price appreciation or narrowness of the rally, but otherwise things are quite different.
Gregory Brown, Income Strategist: What else should investors know about the FAANG companies?
Govil: If you look at the price appreciation for these companies, they’re many multiples what the S&P 500 has appreciated year-to-date, and the last few years. For most of these companies, the competitive advantage is fairly durable and in most cases seems to be strengthening.
If you look at where Facebook’s revenues come from, it’s online advertising – same with Google. And while they may currently dominate the online advertising business, online advertising itself as a piece of the total advertising pie is such a small part and has such a long runway ahead of it that we can’t say these companies have topped out.
In essence, these companies could be very popular right now on a stock basis and sometimes you run into the danger of it becoming a crowded trade. That creates some stock price volatility, but in terms of business models, they’re strong, durable and seem to be strengthening on a qualitative basis in my view. On a quantitative basis, if you look at their financial statements and the returns they generate on invested capital – it’s currently high. Those qualities weren’t as prevalent in the dotcom companies of the 1990s as they are in these FAANG stocks.
Brown: One of the questions I get on the road is – is it time to rotate from growth to value strategies? I hear you talk about valuations. What else is important when you talk about investments at this point in the cycle?
Govil: I’m not a growth or a value guy. In fact, I find this whole approach – in terms of bucketing companies in growth or value – a little bit outside my rational thinking zone. And there are a number of reasons why I take this view. The same companies can sometimes be classified as both value AND growth. I know several companies in the S&P 5001 that have alternated between the growth and value bucket in the last 10 years. Right now there are several companies that are both in the Russell 1000 Index2 and the Russell 10003 Growth Index.
So I don’t look at it as either or. Ultimately for us, what matters most is what’s the future prospect for shareholder earnings and what’s the current valuation? As far as which bucket it’s in, we don’t care.
Don’t miss the next episode of the OppenheimerFunds World Financial Podcast! Listen to Episode 17 on FAANG stocks and subscribe here.
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- ^ The S&P 500® Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy the index includes reinvestment of dividends but does not include fees, expenses, or taxes.
- ^ The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the Russell 3000® Index.
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