CrowdStrike CEO George Kurtz
Crowdstrike CEO sees opportunites in the cloud
02:09 - Source: CNN
New York CNN Business  — 

Big Tech companies have been the hottest stocks on Wall Street all year, pre- and post-pandemic. But some experts think it’s time for a new crop of dynamic up-and-comers in fields like virtual reality and health tech to take center stage in your portfolio.

Part of the problem is that the run-up in the FAANG stock prices has been so massive that they’re taking over the entire market. Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google owner Alphabet (GOOGL) – as well as Microsoft (MSFT) and Tesla (TSLA) – are now worth a combined $7.7 trillion.

The first six now make up nearly a quarter of the entire value of the S&P 500 (Tesla is still not in the index), and managers say that’s getting a bit stale for investors.

“We’ve reached an unprecedented level of concentration in the market. It’s not really passive investing if you’re putting money into an index fund and you’re only getting a handful of stocks,” said Don Townswick, director of equity strategies and portfolio management at Conning.

So investors need to look beyond the top tech stocks – and more at smaller, rapidly growing, innovative companies that can be the sector’s next leaders, one fund manager says.

“Investors still need exposure to growth, but they need to separate giant tech from more innovative tech,” said Michael Loukas, principal and CEO of TrueMark Investments, which runs the actively managed TrueShares Technology, AI & Deep Learning (LRNZ) exchange traded fund.

Loukas is focusing on emerging leaders in dynamic industries like virtual and augmented reality, cybersecurity and health care tech, he told CNN Business in an interview. The earnings and sales growth for these smaller companies is expected to be much higher than for the larger, more mature giants of tech.

“You want to invest in areas that had tailwinds before the lockdown that have only accelerated since then. These are not more consumer companies like Apple, Amazon and Google. These are fundamentally incorporated into the machinery of big businesses,” Loukas said.

‘You can’t just own tech through the Nasdaq-100 QQQ fund,” he added. “That’s basically FAANG.”

Cybersecurity stocks could be among the big winners

Loukas said his fund has sizable holdings in cybersecurity firms Zscaler (ZS) and Crowdstrike, data monitoring company Datadog (DDOG) and authentication provider Okta (OKTA).

But the fund is also making bets on the burgeoning gaming and esports business through an investment in newly public Unity Software and is buying innovative health care tech companies Guardant Health (GH), Schrodinger (SDGR) and Berkeley Lights as well.

Connings’ Townswick added that there are smaller, nimbler tech stocks that are probably undervalued and could do well even if the FAANGs, Microsoft and Tesla finally cool off.

“Eventually the market will reward a broader set of companies,” Townswick said.

Big Tech under pressure

Meanwhile, Big Tech certainly isn’t helped by recent regulatory and political actions like the government’s antitrust case against Google.

Apple, Amazon and Facebook are already under fire from both Republicans and Democrats and that may not change regardless of whether Joe Biden wins the presidential election or Donald Trump gets a second term.

“One of the few bipartisan issues of agreement is that tech companies should be regulated more. That sets things up for a very different environment for big techs,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors.

“There are better opportunities with mid-sized tech companies. Antitrust regulation is designed to help smaller rivals,” he added, saying that smaller cloud firms that compete with the likes of Amazon, Google and Microsoft could benefit.

Gokhman also said smaller tech firms are more attractive than big techs right now because they are cheaper and more domestically focused.

So smaller techs would benefit more from the expected eventual round of new stimulus from Washington that could come – either shortly before or just after the election.