The big tech names such as Facebook, Amazon and Netflix have been down big from its highs a few months ago. Few people disagree that these aren’t great companies. High growth with massive revenues and varying levels of profitability depending on the company.
These stocks were at wild valuations not long ago, and there was near unanimous support for buying and owning these stocks in the financial community. Now that they’re down 25-35%, the tone has changed. Note: This is basically how it always works and perhaps is an indicator that you should ignore most of the financial media.
So, with these stocks on sale, should you buy? I think there are two main things to consider.
First, if you own a decent chunk of index funds like many investors do, there’s a good chance that you already own a lot of these tech names. Let’s look at an example. If you pull up the Schwab S&P 500 Index fund (SWPPX), you can check out the top holdings in the fund. As of writing, here are the top holdings in the fund and the percentage of what they represent in the fund:
- Apple – 4.51%
- Microsoft – 3.48%
- Amazon – 3.27%
- Facebook – 1.7%
- Berkshire Hathaway – 1.62%
As you can see, the four largest holdings are big tech names. Interestingly, Berkshire is no. 5 and Berkshire owns a ton of Apple stock!
Tech is moving the market in more ways than one. First, most investors are watching these big names to take direction on which way the market is heading. Second, these stocks literally make up the largest chunk of these index funds. If Apple, Microsoft, Amazon and Facebook are heading lower, it’s really hard for the S&P 500 to head higher.
So, before you rush to buy these stocks, consider how much you indirectly already own via your index funds before doing so. Are you comfortable with the level of diversification you’d have if you purchased more directly?
Now, with that out of the way, it’s definitely a great time to buy these stocks. Recently I filtered through stock data and discovered that there are only four US non-energy companies that have a market cap of at least $100 billion and are growing revenues at 25% or more each year. They are Facebook (FB), Netflix (NFLX), Amazon (AMZN) and Salesforce.com (CRM).
This is a select group of companies achieving incredible levels of growth even at the large size of these companies. Note that of the names listed above, Facebook’s P/E ratio is the only one not at or near triple digits. To me, this shows just how beaten down Facebook has been due to bad press.
I personally like to buy stocks that have incredibly healthy businesses but have been beaten down by bad press. Facebook certainly falls into this camp. The recent company that I bought for similar reasons was Chipotle (CMG) after it was beaten down due to a series of food illness headlines. The stock has rebounded nicely from these lows.
One of my favorite positions is already documented here on this site: Netflix. But, Facebook is really attractive at current levels. Is there risk? Of course. The bad headlines seem to be coming every day for Facebook, but Facebook is also a popular punching bag for the press these days. It’s not clear how much of this is affecting the actual business (less than you’d think in my opinion).