No FANG for you: JPMorgan says sell momentum stocks

Published Fri, Apr 1 20166:00 AM EDTUpdated Fri, Apr 1 20167:22 AM EDT

Despite a strong rally for the stock market since the lows in February, JPMorgan strategists warn that the broader sell-off in popular momentum names may not be over. "We believe high momentum stocks may be at further risk in early April when most quant portfolios next get rebalanced," the firm's U.S. equity strategist, Dubravko Lakos-Bujas, wrote in a note to clients this week, defining one of the potential hurdles ahead. "It is prudent for investors to avoid exposure to pure momentum stocks (at any price) and we advocate rotating into more reasonable valuation (i.e., momentum at reasonable price)," he added. In the past 12 months, high-beta names like Facebook , Amazon.com , Netflix and Alphabet (Google), also known as FANG stocks, have seen their shares rally to new highs, posting returns greater than 35 percent. Source: FactSet The return of volatility in the earlier part of 2016, however, led investors to take profits in most of these names. But as the market makes another attempt to reach new highs, many investors have been left wondering whether it's now the time to jump back into those stocks. JPMorgan strategists think the answer is probably not. "If the current momentum sell-off was to be considered complete, out of the 19 sell-offs since 1984, it would be one of the shortest (less than two months) in duration, ninth deepest decline with the third most intense sell-off (as measured by decline per month)," Lakos-Bujas noted on the fragility of these moves. Among the reasons that could take out the floor mat from under momentum stocks, JPMorgan strategists point to the weakness in the dollar, a bleak economic outlook and quant portfolio rebalancing into more stable names. According to the firm, some of the momentum stocks at risk include names like Netflix and Amazon.com — two stocks that are already down more than 14 percent from their 52-week highs. Instead, the investment house recommends clients pursue value stocks as an alternative to momentum, particularly given the uncertainty over the long-term effects of loose monetary policies around the globe. "In sum, while cyclical growth has historically been the impetus for value/momentum rotation, the current period is unique given the outsized role central bank policies have played in the economy and consequently for equities," Lakos-Bujas wrote, blaming some of those actions for fueling "equity momentum bubbles" in the last two years.

FANG (Facebook, Amazon, Netflix and Google) apps on a smartphone.

Adam Jeffery | CNBC

Despite a strong rally for the stock market since the lows in February, JPMorgan strategists warn that the broader sell-off in popular momentum names may not be over.

"We believe high momentum stocks may be at further risk in early April when most quant portfolios next get rebalanced," the firm's U.S. equity strategist, Dubravko Lakos-Bujas, wrote in a note to clients this week, defining one of the potential hurdles ahead.

"It is prudent for investors to avoid exposure to pure momentum stocks (at any price) and we advocate rotating into more reasonable valuation (i.e., momentum at reasonable price)," he added.

In the past 12 months, high-beta names like Facebook, Amazon.com, Netflix and Alphabet (Google), also known as FANG stocks, have seen their shares rally to new highs, posting returns greater than 35 percent.