It is a cold season for technology investors who hoped that the same handful of stocks that have led the market up since 2014 would keep rallying forever. The mighty have fallen.
Key sector benchmarks like the Technology Select Sector ETF (NYSE:XLK) have dropped 15 percent since Sept. 30, with Facebook (NASDAQ:FB) down a harrowing 40 percent as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google parent Alphabet (NASDAQ:GOOG) enter formal bear market territory. But the carnage isn???t limited to the famous FANG stocks of Facebook, Amazon, Netflix and Google.
Apple (NASDAQ:AAPL) has fallen 24 percent on hints that iPhone sales have finally peaked. High-flying Nvidia (NASDAQ:NVID) has crashed, dragging smaller semiconductor stocks down with it.
The problem is simple. As a sector, technology just isn???t growing faster than the market as a whole any more. If anything, some of these companies look downright stagnant now. Over the last few months, we???ve crunched their business models and found them wanting.
At best, I see eight percent earnings growth for the sector in 2019. After 16 percent this year and 14 percent in 2017, Silicon Valley looks like it???s becoming an active drag on the S&P 500 and the economy as a whole.
If you???re looking for market-beating growth at a reasonable price, it???s time to let the FANG stocks go. We???re watching that process play out now as investors rotate into the growth engines that are still spinning: the financials with the Fed on their side, a strong consumer and the best manufacturers.
All three of those sectors are tracking more robust expansion than technology or the S&P 500 as a whole, for that matter. Factor Amazon out of the consumer group and all three are cheaper than technology on an earnings basis.
Faster growth at a better price? It is no wonder money is pouring out of the FANG stocks and into the true disruptive stocks of tomorrow we chase in my GameChangers service.
And between you and me, I think legal cannabis will be one of the themes that thrives in the new year. It doesn???t fit the sector maps yet, but we covered my top picks there in the recent Marijuana???s Second Wave Summit. (You can still download the video here for a limited time.)
Don???t Act on Reflex
Finding the hot spots is relatively easy. The hard part is staying disciplined until a shell-shocked market finishes mourning the FANG era and gets back to work.
In the meantime, we???re going to see a lot of very smart people do surprisingly foolhardy things. As the once-invulnerable FANG bloc breaks up, the temptation to chase any stock with a similar profile will get intense.
At least on paper, energy fits that profile. Year-over-year comparisons on oil giants like ExxonMobil (NYSE:XOM) are still easy enough that Wall Street is banking on 26 percent earnings growth there next year.
That???s better than what all but the most vibrant names in Silicon Valley have been able to deliver in a long time. But there???s a strong chance that it???s only a paper promise.
While investors were watching technology unravel, West Texas Intermediate crude prices have crashed 35 percent over the same timeframe. Brent petroleum traded overseas is down 17 percent.
We haven???t seen oil drop so far since 2014. Back then, seasonally light Thanksgiving week trading turned into a full-fledged commodity crash.
And U.S. crude already has dropped as far as it did between June and Thanksgiving of that year, which leaves me wondering how far the knife will fall before hitting bottom.
But with oil now cheaper than it was 12 months ago, it???s hard to justify maintaining huge growth targets on the companies that pump the petroleum.
There???s no relief coming from overseas. OPEC is in shambles. Venezuelan exports already have slowed to a relative trickle and Iranian oil is finding ways around renewed sanctions.
None of this is bad for U.S. consumers. We???re independent from foreign energy for the first time in a generation and low fuel prices feed directly into household spending.
As investors, however, holding ExxonMobil through the previous oil bust was only asking for pain. Four years later, the stock still hasn???t fully recovered from a harrowing 40 percent slide.
The cost of drilling wells and pumping crude hasn???t dropped in the last year. While the giants look more efficient now on paper, it???s because they???ve cut their operations to the bone.
ExxonMobil has reduced expenses 37 percent since the glory year of 2013. But that???s less about efficiency than simple brutal shrinkage.
Revenue is down 37 percent over the last five years. Costs are down 37 percent. The margins haven???t moved. And when oil drops, that means all of Wall Street???s projections are written in sand.
We???re looking for big downgrades on Big Oil over the next three months, especially if we???re looking at a repeat of 2014 here.
In that scenario, I like the airlines a lot. Back in 2014, Amazon was one of the worst stocks on Wall Street but Delta (NYSE:DAL) and Southwest (NYSE:LUV) were two of the best.
My subscribers have made a lot of money playing the group when fuel costs drop. It might be time we come back to the table.
Either way, if you???re flying this long holiday weekend, you???ll be able to see the crowds for yourself. That???s where the real action is right now.