August 23, 2018 / 11:04 AM / a month ago

RPT-ANALYSIS-Wall St's sector shakeup will let more tech stocks shine

    By Noel Randewich
    SAN FRANCISCO, Aug 22 (Reuters) - Chipmakers,
cloud-computing sellers and even credit card payment companies
will have a greater chance to stand out in the information
technology sector next month following the largest-ever shakeup
of Wall Street's industry classification system.
    In a reorganization spanning three sectors, none of the
so-called FANG high-growth stocks - Facebook, Amazon.com
, Netflix and Google-owner Alphabet -
will be classified as technology companies, even though
investors widely view them as the leaders of a tech rally that
has powered the stock market higher in recent years.
    On Sept. 24, S&P will shift Alphabet, Facebook, Twitter
, Paypal and videogame makers Electronic Arts
 and Activision Blizzard from the S&P 500
technology index to an expanded telecom group, renamed
"Communications Services." 
    Netflix, which like Amazon, is currently part of the
consumer discretionary group, will also move to the expanded
telecom group. Amazon will stay put in consumer discretionary.
    The changes are part the largest-ever reorganization of the
Global Industry Classification Standard, or GICS, an industry
taxonomy widely used by investors. MSCI will adjust its indexes
in November.
    Meant to reflect the economy's evolution, the overhaul of
GICS will affect how mutual fund managers choose between stocks,
and force passively managed sector funds to reallocate billions
of dollars. Removing Alphabet and Facebook from technology
indexes may lead investors to pay more attention to smaller,
remaining technology companies.
    "People will be able to get a clear look at the tech sector
without being overwhelmed by these behemoths that really are
media companies," said Mike O’Rourke, chief market strategist at
JonesTrading. 
    Exchange-traded funds that passively track indexes have
about $89 billion invested in the technology sector, much of
which will have to be reinvested to stay in line with the sector
changes, potentially creating volatility, according to data from
Thomson Reuters Lipper.
    While many individual investors will still view Alphabet and
Facebook as tech stocks, mutual funds have internal rules
limiting how much they can invest across different sectors.
    With Facebook and Alphabet shifted into the communications
sector, fund managers will no longer have to choose between them
and Apple or Microsoft, or bets on chipmakers and
cloud-computing, said Credit Suisse analyst Patrick Palfrey. 
    "And at the same time, an investor can go to the
communications sector and overweight an internet services
company against a traditional telecom company," Palfrey said.
"This is important for investors who have mandates to stay
within certain parameters of a sector."  
    Technology stocks have been top performers driving Wall
Street's gains in recent years, including Apple, which
currently makes up 16 percent of the S&P 500 IT index.
    Apple will increase its weight in that index to 20 percent
following the removal of No. 2 component Alphabet and Facebook,
its fourth largest member.
    The changes will also increase the weight of smaller tech
companies. Microsoft, Visa, Intel and Cisco
Systems will round out the S&P 500 IT index's largest
five components, followed by Mastercard, Oracle 
and Nvidia.  
           
           
    Even without some of its highest-profile members, the
technology sector will boast companies with track records for
earnings growth and stock performance. 
    Share prices of Visa and Mastercard, not typically viewed as
tech companies, in 2018 have surged 23 percent and 34 percent,
respectively.
    The S&P 500 tech sector under its future configuration would
have gained 18 percent so far in 2018, outperforming the 16
percent rise under its current configuration, according to
Palfrey. 
    In its future configuration, the S&P 500 tech sector is
currently trading at about 18 times expected earnings, compared
to 19 times earnings with its current constituents.
     
    Following the GICS restructure, tech will account for 21
percent of the S&P 500, compared to 26 percent currently,
according to Thomson Reuters data.

    
 (Reporting by Noel Randewich; Editing by Alden Bentley and
Leslie Adler)
  
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