Long in the Tooth

Long in the Tooth

Are FANGs leading the market?

Photo: Gyöngyvér Fábián. Source: Pixabay

Over the past year, the stocks have struggled. Fears about global growth, about China, about a strong dollar, about weak commodity prices have held them back. Year-to-date, the stock market is essentially flat.

But four stocks have stood out: Facebook, Amazon, Netflix, and Google. So far, each of these stocks is up 40% or more; Netflix and Amazon are up over 100%. An equal-weighted portfolio of these FANG stocks, as they are called, is up over 75%. Without these four companies (which actually have five stocks, since Google’s voting and non-voting shares are both in the index), the S&P 500 would be down 2%. What does this mean?

Equal-weighted FANG Portfolio. Source: Bloomberg

These four firms are dynamic, growing companies. Facebook is the dominant player in mobile advertising, with 1.4 billion monthly active users. Amazon’s cloud computing unit has helped them increase their sales, margins, and profits. Netflix is becoming the preeminent subscription video service. And Google has shown that they can control costs. Interestingly, all four firms are growing globally, despite the slowdown in China and problems in other emerging markets. They’re also eating other companies’ sales—like Amazon in retail, or Netflix taking over cable. And the stocks are very expensive.

The average multiple for these four stocks is over 90 times earnings, versus 18x for the S&P 500. Without them, the S&P’s PE would be only 12.5x. Clearly, the market is expecting great things from them. But is this at all realistic? Together, they generate about 200 billion in revenues—growing about 20% per year. That’s impressive, but it may not be enough to justify a 90 PE.

When a few popular stocks mask the market’s general weakness, this can be a dangerous situation. Sometimes, it means that there are hidden currents moving just below the surface. We’ve seen this movie before: young upstarts make good, attract capital, and start to re-make the world in their own image. But if they stumble, watch out. FANGs in your portfolio could bite!

Douglas R. Tengdin, CFA

Chief Investment Officer

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