Overvalued FANG Stocks Slump

US technology stocks fall back towards their fair values after Thursday's market rout, which saw the Nasdaq fall 5%

Dave Sekera, CFA 4 September, 2020 | 9:31AM
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Wall Street, New York

After hitting a new all-time high on Wednesday, the Morningstar US Market Index dropped 3.58% Thursday, the largest single daily decline since June 11. While single-day declines of such magnitude are generally unusual - over the past decade, there have been only 18 times the market has sold off this much in a day. Even though there doesn’t appear any single catalyst for this significant sell-off, we are not surprised by this market pullback – indeed more than half of the stocks we cover are overvalued as of September 2. Since we began calculating this price/fair value metric in 2007, there have been only a few other times that our fair value indicator has been this overvalued.

The bulk of the sell-off occurred within the technology sector, which dropped 6.08% today. In our view, after being the best-performing sector thus far this year, technology is the most overvalued space within the index. According our price/fair value metric, the median stock in the tech sector was 1.24 times overvalued on September 2. Not only is it the most richly valued of all the sectors we cover, but neither it nor any other sector has ever traded at such a high price/fair value since we started calculating this metric in January 2007. Within the tech sector, for US-listed companies that we rate, there are 56 firms that we believe are overvalued and have rated 1 or 2 stars (out of 5 stars); whereas there are only 11 stocks that we think are undervalued and rate 4 or 5 stars.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.