October 2, 2018 / 11:16 AM / in 15 days

U.S. tech sector getting by without Facebook and Alphabet

SAN FRANCISCO (Reuters) - The technology sector appears to be doing just fine on Wall Street a week after it lost two of its highest-profile components to a newly christened communication services group.

FILE PHOTO: A Google sign is seen during the WAIC (World Artificial Intelligence Conference) in Shanghai, China, September 17, 2018. REUTERS/Aly Song/File Photo

The S&P 500 technology index .SPLRCT has gained 1.3 percent since the start of last Monday, when Facebook Inc (FB.O) and Google parent Alphabet Inc (GOOGL.O) - half of the FANG group of hyper-growth stocks that propelled Wall Street higher in recent years - were pushed out of technology and into the telecom sector, renamed “communication services.”

During that short period of time, the technology index outperformed communication services and consumer discretionary, the third sector affected by the largest ever overhaul of the Global Industry Classification Standard.

Bank of America Merrill Lynch recommended on Monday that investors be overweight technology and underweight communication services and consumer discretionary.

“Old Tech represents a lot of what we like: net cash and healthy balance sheets, free cash flow generation, leverage to unit volume sales growth and low earnings risk,” bank strategist Savita Subramanian wrote in a report.

Following the changes to GICS, Cisco Systems Inc (CSCO.O) and Intel Corp (INTC.O) join Visa Inc (V.N), Microsoft Corp (MSFT.O) and Apple Inc (AAPL.O) as the tech sector’s largest five components.

Mature companies with storied histories compared to many of their Silicon Valley neighbors, Cisco and Intel have struggled to grow in recent years, but they deliver steady earnings and return cash to shareholders through dividends and buybacks.

Netflix Inc (NFLX.O), another FANG stock, was moved from consumer discretionary to communication services as part of the reshuffle. It has since rallied nearly 6 percent, helping push the communication services index 1 percent higher.

Up 20 percent so far in 2018, technology may benefit from the absence of Alphabet and Facebook, which have underperformed due to worries about regulation in response to criticism of their handling of user data.

Amazon, the fourth FANG stocks, remains in consumer discretionary and is now the only part of FANG not in the communication services sector.

Since the start of last Monday, the consumer discretionary has risen 0.4 percent. The S&P 500 lost 0.2 percent during the same period.

Consumer discretionary and communication services, which between them now include all of the FANG stocks, remain crowded trades at risk of selloff, according to Subramanian.

RBC in a report on Monday named cloud computing company ServiceNow Inc (NOW.N), software maker Synopsys Inc (SNPS.O) and payment processor Worldpay Inc (WP.N) - all within the technology sector - in a list of 12 top picks for U.S. stocks.

Reporting by Noel Randewich; Editing by Lisa Shumaker

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