Big Tech's stock market reign may finally be about to end
Posted December 1, 2020 3:09 p.m. EST
CNN — Who says investing is hard?
All you needed to do for the past few years to enjoy solid gains in the stock market was buy an S&P 500 or Nasdaq 100 index fund. That provided exposure to market darlings like the FAANG quintet of Facebook, Amazon, Apple, Netflix and Google owner Alphabet as well as Microsoft.
The Big Tech stocks have boomed thanks to strong gains in revenue, market share and earnings over the past few years — which has raised antitrust concerns and created intense regulatory scrutiny.
But that dominance might be about to change.
After years of growth stocks outperforming the market, some strategists and fund managers think it could be time for value sectors like banks, health care, energy, retail and others that have been laggards to emerge as new market leaders.
"We're coming out of a multi-year period of extraordinary outperformance from big cap techs. Value stocks have been so inexpensive," said Eric Kuby, chief investment officer with North Star Investment Management.
"A major rotation is going to take place. When valuations are so out of whack, there has to be a reversion," Kuby added.
Looking beyond tech stocks for winners
Kuby likes smaller consumer companies like Acco Brands, which owns Mead notebooks and Swingline staplers, as well as financial firms like the suburban Chicago-based bank Wintrust.
Banks, retailers and energy stocks all look attractive, said David Harden, president of Summit Global Investments. He thinks these three more value-oriented sectors will benefit from a stabilization in the economy in 2021 — especially if there are multiple Covid-19 vaccines available.
"There is no question value stocks will outperform. It's time to look for high quality and low volatility with larger companies," Harden told CNN Business. Some of Harden's top picks for 2021 include JPMorgan Chase, Walmart and Exxon Mobil.
Still, some experts say that value stocks and growth industries like tech and biotech can both do well for the foreseeable future. There is no particular reason why the FAANGs have to fall in order for other sectors to do well.
"Value versus growth is the perennial debate," said Dec Mullarkey, managing director of investment strategy at SLC Management. "The recovery will be broader based because the market rally has been so tech-centric. But I don't see growth falling out of favor even if value stocks come back."
Growth at the right price
That's why it might make more sense for investors to look for companies that have the characteristics of both value and growth — stocks that trade at reasonable prices but also have the potential to generate solid gains in earnings and revenue.
"We continue to think the rotation to value should be focused on creating a more balanced value/growth portfolio, and not abandoning growth/tech en masse," said Tom Essaye, editor of The Sevens Report investing newsletter, in a report Tuesday. "Tech also can do well."
Essaye added that there is "simple logic" for this prediction. "Massive stimulus" could be coming from the incoming Biden administration as well as a continuation of 0% rates from the Federal Reserve.
"The value versus growth question simplifies the market a bit. You want to find durable growth," said Doug Rao, a portfolio manager with Janus Henderson, in an interview with CNN Business.
With that in mind, Rao's firm owns stakes in industry leaders like travel company Booking, Disney, LVMH and Mastercard.
"The transformation to a digital economy has been the biggest change for companies in every industry," Rao said. "You want to look more for companies that are on the right side of that transformation."