investors who have been blindly buying all big techs got a rude awakening this week after Netflix imploded. But the good news from Tesla proves that some top momentum stocks can still thrive in this rocky market.
The latest results from Tesla (TSLA) and Netflix (NFLX) show how silly it is for investors to buy into themes and memes like the FAANGs, or MT. FAANG, if you want to add Microsoft (MSFT) and Tesla (TSLA) to the Facebook (FB) (Meta)/Amazon (AMZN)/Apple (AAPL)/Netflix (NFLX)/Google (GOOGL) (Alphabet) quintet.
This is a stock picker’s market.
“This environment will create an important backdrop for active investing,” said Ken McAtamney, head of William Blair’s global equity team, in a report.
“Understanding companies with differentiated business models, unique cultures, and durable competitive advantages will be increasingly crucial to determining investment performance in this complex environment,” he added, noting that “the dynamic shifting of corporate winners and losers remains a constant.”
One of the biggest mistakes that an investor can make is assuming that all stocks in a certain sector should rise and fall in tandem. That’s an overly simplistic, binary view of the world.
Instead, investors need to do their homework and find companies with strong business models and healthy fundamentals.
“Not all businesses are created equally,” said Paul Moroz, chief investment officer with Mawer Investment Management.
Moroz said that it’s going to become more important to find companies that aren’t as dependent on discretionary consumer spending. He noted that firms like insurance broker Marsh & McLennan (MMC) and UK-based cleaning supplies firm Bunzl (BZLFY) are examples of “boring” companies that are doing well.
And even within the tech sector, Moroz said he likes Microsoft (MSFT) because of the steady subscription revenue for its many business software products.
The Big Tech leaders of the Nasdaq are a broad and diverse group. That’s why investors shouldn’t assume that Netflix’s problems are bad for the rest of the tech sector or that Tesla’s good news gives traders the all clear sign to buy every momentum stock in sight.
“First quarter results so far highlight our view that investors need to be selective,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a report this week.
Haefele added that “Tesla’s record profit underlines rising global demand for electric vehicles,” and also pointed out that “the disappointing outcome for Netflix shouldn’t obscure the robust outlook for subscription services.”
Netflix’s big miss could wind up being a company specific issue. It’s not necessarily a reason to shun all of the other FAANGs.
Of course, investors are still willing to flock to companies that are reporting strong results. The success of Tesla shows that traders are not afraid of high-priced stocks that value investing gurus like Warren Buffett tend to avoid.
Yes, Tesla is expensive when you look at traditional price-to-earnings ratios and compare Tesla with the rest of the auto industry. But as long as Tesla lives up to the hype, that may not matter.
“Tesla’s ability to achieve a trillion dollar valuation…is a confirmation that paying up for future earnings potential is still a rational investment with the right business model,” said Louis Navellier, founder of Navellier & Associates, in a report Thursday.