Fed up with FAANG and meme stocks? Here’s a new investing strategy

Stop us if you’ve heard this before. Giant tech stocks are finally due for a prolonged cooling-off period and investors need to start adding more value stocks, such as banks, oil firms and retailers, to their portfolios as the economy recovers.

The so-called FAANGs have been market leaders for several years running. But the stunning surge for tech could be coming to an end.

“That’s the big question of the moment for investors. Is this it for FAANG?” said Donny Kranson, a portfolio manager for the Vontobel Quality Growth fund.

The Nasdaq is up about 3% so far in 2021. That’s a respectable gain, to be sure. But it hasn’t been a smooth move higher. It’s been choppy, and the Nasdaq’s increase is lagging that of the Dow and S&P 500 this year.

Value investing making a comeback

Within the S&P 500, value stocks are beating growth stocks by a wide margin. The iShares S&P 500 Value ETF is up 8% compared to just a 1% gain for the iShares S&P Growth ETF.

“We have seen strong value performance year to date. People are starting to take notice,” said Joel Schneider, deputy head of portfolio management at Dimensional Fund Advisors.

What’s more, the performance of the top techs that dominate the S&P 500 has been mixed. Shares of Amazon, Apple, Netflix and Tesla are all down n 2021 while Facebook, Google owner Alphabet and Microsoft are in positive territory.

Several top investment experts think that the volatility for tech will continue. Jeff Gundlach’s DoubleLine just put out a new paper declaring that value investing is not dead.

“Given the protracted, more-than-decadelong run of growth relative to value, it is logical to consider a reallocation of some of that capital away from growth and into value,” said Emidio Checcone and Brian Ear, portfolio managers of the DoubleLine Equity Value Strategy fund, in the report.

Another top money manager is betting that more market pain could be in the cards. Cambria, the firm run my Meb Faber, just announced that it is converting what was a global sovereign bond ETF to a fund that will bet against international stock markets. The ticker: FAIL.

This fund will complement a similar US-based ETF called TAIL that bets against the S&P 500. It’s an interesting strategy given that some investors are growing concerned about the future performance of the tech stocks that dominate the S&P 500.

Stay away from the fad stocks

There are also increased worries about the meme-ification of the stock market. Reddit-loving investors, armed with stimulus money and easy, inexpensive access to trading thanks to brokerages like Robinhood, have been bidding up speculative companies like GameStop and AMC.

“This new phenomenon of ‘stocks as entertainment’ has the potential to end in disaster for brokerage account values when momentum reverses and share prices decline,” said Justin Tugman, portfolio manager at Janus Henderson, in a report.

“We have seen this behavior before during the tech wreck of 2000. While investor euphoria can last far longer than seems sane, eventually valuation does matter,” he added.

The big worry is that investors are not learning from the mistakes of previous market manias.

“Many of these companies are not making any money. Once rates start to rise, these companies are even more at risk. Be wary,” said Andrew Slimmon, a managing director at Morgan Stanley Investment Management, in a report.

Slimmon added that many companies with rapidly growing sales but no profits “are trading at bubble territory levels.”

Banks, energy and retail looking attractive

So which stocks are the best bets right now?

Banks, consumer stocks and other economically sensitive companies should benefit if long-term bond rates keep rising and the job market picks up steam.

“We are seeing a move toward cyclicals in general as yields and inflation expectations push higher,” said Fiona Cincotta, senior financial market analyst at City Index, in an interview with CNN Business.

“It may not be a straight line up. These rallies rarely are. But as we move forward, the data still shows signs of improvement,” she added.

Investors seem to recognize that the FAANGs are not the only companies that hunkered down during the pandemic and found ways to continue thriving.

“Tech companies were rewarded for being nimble during Covid. But the market is now rewarding more companies that adapted. The rally is broadening out,” said Stephen Lee, founding principal at Logan Capital Management, in an interview with CNN Business.

Lee said that retailers like Williams-Sonoma should benefit from stronger consumer demand and a resilient housing market. And as people begin to travel more, energy, airlines and other value sectors should continue to rebound too.

Janus Henderson’s Tugman noted that the “post-pandemic reopening of the economy” and rising inflation expectations also bode well for energy, chemical and steel companies, which he argues will be able to pass on the costs of higher commodity prices to their customers.

That said, investors shouldn’t ignore tech or other growth stocks entirely. They may just need to ratchet down their exposure to riskier companies and also be sure to look for quality companies.

“Some stocks have been growing just on hope. The rise of individual investors not buying stocks for their earnings is worrisome,” said Vontobel’s Kranson. “You have to pay for the quality of the business.”

In other words, momentum shouldn’t be confused with success.

“The better a stock does, the more investors tend to believe its future prospects must be good. But that’s not always the case,” Kranson said.