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Is Opportunity Brewing In Cyclicals and Value?

John Carey, Portfolio Manager

Doug Famigletti, Portfolio Manager

Looking back on the past 3 quarters, we have seen an unprecedented flow of money into growth and tech stocks. The Covid-19 pandemic has created massive shifts in the way we work, socialize, and entertain resulting in the acceleration of social and IT trends.

Cash has been piled into a handful of technology and communications companies that many investors believe will be the ultimate “winners” of this pandemic (as if that’s possible). Most notably, the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have seen stock prices soar, reaching euphoric highs this past August.

For months, analysts have speculated whether we are on the verge of a tech bubble. Recent data provided by Yahoo Finance shows that perhaps these FAANG stocks are beginning to come back down to earth. In reference to Figure 1, FAANG stocks peaked around August 26, 2020 and have been on steady decline through October 28, 2020. Average decline of FAANG stocks over this two-month period was -10.29% compared to the XLI which was down only -3.36%, and the RLV and XLF which were down -4.20% and -4.41% respectively.

As FAANG stocks' momentum slows, and the economy adjusts to the new normal, we may start to see more dollars transfer from technology and communications to cyclicals and value. Cyclical industries tend to do very well during periods of economic expansion and tend to suffer during periods of recession. Value stocks, or stocks that are priced low in relation to basic measures of corporate performance, tend to be more plentiful after large selloffs in the market that lead to recessionary periods. While we are certainly not trying to make predictions or time the market, we do see lots of opportunity brewing in cyclicals and value as we head into the Presidential election.

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. All material of opinion reflects the judgement of Adviser at this time and are subject to change. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.

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