The long-running bull market is starting to correct. We, and many others, have suggested that investors may want to get out of growth stocks and switch to value stocks in preparation for a market crash or at least a painful correction. The rationale is that value stocks are companies with low debt, cash in the bank, and property unencumbered by excessive debt. However, the basis of intrinsic stock value is forward looking earnings. And, the best earnings in recent years have come from tech stocks like the FANG (Facebook, Amazon, Netflix, and Google-Alphabet).
Protected from a Trade War with China
One of the expected contributors to a market correction, or worse, is the evolving trade war with China. We looked at what you can invest in and not get hurt by a trade war.
It turns out that Facebook, Amazon, Netflix, and Google (Alphabet) either do not do business in China or have a very limited presence. Even though these stocks have become somewhat pricey in the current market they could not be directly hurt in a trade war with China.
CNBC quote Cramer of Mad Money who is saying basically the same thing as he suggests that investors buy given-up-on FANG stocks.
The FANG cohort benefits from having very few ties to the Chinese market, Cramer said, with the use of Facebook, Netflix and Google’s services almost entirely blocked by the government and Amazon facing a sprawling competitor in Alibaba.
Second, “the Federal Reserve is bent on squelching inflation wherever it can find it, ” the “Mad Money” host said, referring to the central bank’s rate hike agenda.
“When that happens, the companies with the highest price-to-earnings multiples are the ones that benefit,” he said.
Thus, the growth stocks that had become very pricey will look very attractive after a reasonable correction.
Slowing US and Global Growth
The stock market recently fell on news that both Caterpillar and 3M projected slower growth. Both of these companies have a huge international presence and are bellwethers of the world and US economies. Both of these companies easily qualify as value stocks but both will suffer a bit as a trade war and excessive debt affect economies around the world. In the meantime, people still watch home movies from Netflix, incessantly use Facebook, “Google” information, and buy everything including the kitchen sink via Amazon.com. These companies will be hurt less or not at all as the US-China trade relationship changes significantly.
Is It Time to Buy Facebook?
After years of stellar growth, Facebook is down 10% this year. There are regulatory issues that could affect the stock but it is still a broadly used platform and a money maker. CNBC’s Trading Nation notes that Facebook has probably hit bottom and is a strong buy.
Facebook is the only stock of the group negative for the year. It has dropped 10 percent in 2018, the bulk of those losses sustained after its notorious $120 billion drop in market cap in late July after its worrisome second-quarter earnings statement.
“If the market begins to roll over, you’re actually going to see the Googles and the Netflixes, some of that fast money, the momentum money, start to sell in a little bit of a panic move, but that money has already disappeared from Facebook,” said Maley.
Thus, it may be a good idea to invest in FANG on the correction with the first target being Facebook which may have already hit its bottom.