The FAANG stocks, Facebook, Amazon, Apple, Netflix and Google, have lost in leadership strength during the last 18 months. But in early 2020 they are showing signs of strength again. Suggesting that the FAANGs might come back, in one last roar of this bull market.
The FAANGs have consolidated, in the last 18 months, but are now showing signs of strength again. And in october of 2019 Apple broke out into new highs, followed by Google in november. And judging by the behaviour of Facebook and Amazon, they might follow Apple’s lead into higher ground. Meanwhile Netflix is the laggard of the group.
The term FANG was coined back in 2013, by the media personality Jim Cramer. FANG is the acronym for the market’s best performing tech stocks Facebook, Amazon, Netflix and Google. The extension FAANG also includes Apple. These stocks all trade on NASDAQ and are part of the S&P500. Big money managers like George Soros, Warren Buffet and David Tepper, have poured money into these names, in the last decade.
These stocks have led the market into higher ground in the last couple of years. And they have been the best performing largecaps, with exploding earnings and market caps. This has spilled over into many other industries as well, taking the market higher. But in the first part of 2019 investors were abandoning them. Because the view was that they had lost their strength and leadership.
I think that both the fundamentals and technicals tells another story. And as previously mentioned Apple and Google broke out in october. Perhaps leading the way for the other FAANGs technically. And although Apple might be a bit extended at this level, after going strong for several months, Facebook and Amazon still looks interesting.
Looking at Amazon’s fundamentals they seem to be stengthening. And Amazon’s fundamental valuation has not been this low for many years. For example its price to earnings ratio has been very high, above 100, for the last decade. But now it is down to around 90, which is actually quite low for Amazon. The most interesting thing about Amazon is that the margins are increasing. And return on equity is increasing as well. Now up at above 25, which is historically very high. This despite a lower stock price than before. Debt to equity is above historic averages as well.
Facebook, Google and Netflix
Facebook is also undervalued based on History, which you can read more about in my analysis of Facebook. Google’s fundamentals are strong as well, compared to many other technology companies. Although tapering off a bit in the last few years. But its P/E is low compared to History. The only fundamental weakspot of the group is Netflix. But even Netflix is undervalued on a relative basis compared to History. And the company has a historically low price to earnings ratio.
The technicals to a large extent support this picture. Which is that the sleeping fundamentals might be waiting to explode. And as we have seen, Apple already broke out, in october:
The iShares Trust Russel 1000 Growth ETF, has a lot of weighting toward the FAANGs. The below picture shows it breaking out above old highs in october:
FAANG, MAGA or WANG?
The FAANGs have led the market in the last years. But lately other names have shown signs of strength as well. Suggesting altered leadership going forward. The financial Times suggested the term MAGA, in mid 2018, playing on the Trump slogan ”Make America Great again”. The MAGA group adds Microsoft and kicks out Facebook and Netflix. This since Microsoft have been going strong in the last year, breaking out before both Google and Apple.
Walmart has been going strong as well in the last year, making Jim Cramer suggest the acronym WANG. This includes Walmart, Apple, Netflix and Google. Disney is another stock to keep an eye on. But despite new stocks going strong the market has not yet confirmed a breakdown of the original FAANG stocks. If they will keep leading the market, or if it will be a cocktail of old and new leadership names remains to be seen.
Ripe for a correction?
The market has been going strong now for a couple of months, and sentiment is a bit too bullish for my taste. And this might mean that a correction is in the cards. Mainly for Apple and Google perhaps. But long term the FAANGs still looks sharp.
Buying only the strongest names might be the best way to get exposure to the FAANGs. Another alternative could be to buy an ETF that tracks them. There is no official ETF that tracks only the FAANG names, but there are a few that are heavily weighted towards them. For example FDN, or First Trust Exchange traded fund, which is weighted towards the Dow Jones Internet composite Index. Another ETF is Invesco QQQ.
The overall evidence points to more upside for the FAANGs. That is my view but I don’t give advice. And caution is adviced, because the downside of this market is big if it starts to roll over. The FAANGs have performed well in the past. And if Facebook and Amazon can break out in the next few months, following Apple’s and Google’s lead, we might see them roar again.
Of the FAANG stocks I am currently only long Facebook.
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