Before the Dot-com bubble burst in 2000, a few successful companies were looked upon to provide leadership to stock prices. Microsoft, Intel, Cisco and Oracle and Verizon Wireless were a few hot names to know. From 1997 to their Dot-com peaks these 5 stocks averaged gains of more than 700%.
From Hero to Zero
The chart above also shows what happened to investors who were late to the party and bought into these stocks around those peaks. They have been waiting to get back to “even” for a very long time. Seventeen years later, three of these former leaders have yet to eclipse their prior high. 10, 15, 20 years is too long to expect an investor to hold a losing hand. After the Dot-com crash, investors believed that these market darlings would recover their leadership role. They were wrong.
After a bear market, the leadership ranks change. The stocks that lead the market to old highs are not the companies that will lead investors out of the bear market. There’s a good reason for this.
To endure a brutal recession or bear market, companies make reactionary changes to their businesses to survive. They fire employees and halt product development. They mothball projects that are too costly. These decisions come at a financial cost that often cripples the company from building on their prior market or product successes. Companies that limp out of a recession struggle to ramp back up fast enough to regain their stature.
New Heroes and Potential Zeros
Flash forward from 1997 to 2017. Facebook, Amazon Netflix and Google, aka “FANG” stocks now provide the market leadership. Their respective market positions appear unassailable, almost bullet-proof. Their quarterly financial results are must-see media events. Everyone has a favorable opinion and expects these companies to dominate and even crush their competitors out of existence. I think they run a huge risk of becoming this generation’s version of dead money.
FANG’s extreme valuations have been chronicled elsewhere so we’ll skip the charts and focus on investor behavior. Leadership names change from generation to generation but investor behavior revolves around a familiar pattern of greed and fear. Investors who are new to stocks are acting on FOMO (fear of missing out, it’s a millennial thing) more than common sense.
The Myth of the Pain-free Recession
Bull markets end. When this bull fades and the bears trample FANG investors, they should be mindful of this history lesson. Amazon won’t be funding drone delivery research when their customers start cancelling Prime memberships left and right. When times get tight, Amazon will fire employees just like every retailer before them did.
When Coke, Disney and Home Depot cut their advertising budgets, Facebook will feel it and be forced into reacting to survive. When consumers feel the pinch of layoffs, canceling their Netflix subscription will be an easy cost saving measure to take. Apple will be subletting space in their new headquarters.
The financial cost to these companies of enduring a painful bear market/recession will cost them their reputation as market leaders too. When the next bear ends and a new bull market begins, FANG will be replaced by some new herd of unstoppables.