Lately I have been thinking of how FANGs have performed in 2017, in fact, I think they generally perform very well in almost any year. And although the FANG acronym only refers to FB, AMZN, NFLX and GOOG, in fact, you could extend it to other companies too, such as ADBE or NVDA. FANGs are just huge tech (say hot, fancy, popular) stocks that are performing well, everyone has heard about them and whose fundamentals or influence can indeed catch up with their stock performance.
I was just thinking, have you had come up with a quantitative way to identifying these stocks?
It’s a compelling argument to me, but I worry that with these valuations when they fall they’re going to fall hard … even if it’s just temporary. In p123, can we create an equal weighted FANG index and create a custom time series in which we can use moving averages to jump in and out of the index when there are prolonged downturns?
Good article. I have always liked Josh. He used to be a regular on “Fast Money” and could be now as I never watch it anymore. As I understand from one of his articles a while ago, he (now with Ritholtz Wealth Management, LLC) can be included among those who follows robots. He mentions that “Bridgewater runs on algorithms,…” in the linked article but I think he does too. Although Josh follows his own path—which is why I like him so much. On one of the “Fast Money” shows he was highly critically of cherry-picked algos.
I have Been investing in QLD since 2009 pulled out 3 times lost big time. 30% last year with QLD, SPY, SHY portfolio. When will this end? I don’t know. I do know that only 10% of active portfolio managers have beat the market the last 10 years and it keeps getting worse. This tells me don’t pick stocks just index. Until someone can tell me why the robots are not going to win I will stay with QLD.
I wish someone had a crystal ball that could tell me when FANG is dead.
I was recently trying to capture the attributes that to me constitute “FANGyness”. The essential qualities are, in my mind, relative performance, liquidity, and low volatility. I think stocks like MA or BA (at least until recently) are definitely FANGy, even though they are not part of the tech sector. I also think that while brand recognition, cash flow margin and sales growth may be important attributes in helping a company become FANGelicious, they are not the essence of it.
Based on that interpretation I created a ranking system to identify current FANGs. I then compared that ranking against lists that seek to emulate FANG success. I found that 40 of the IBD 50 score 90+ in this system, and 22 of the 23 stocks currently held by the FNG ETF score 90+ (in fact, 21 of the 23 score 95+). Right now the system picks the following top 30 from all US stocks:
I really hate it when people call the FANGs bubbles or compare it to 2000.
Facebook and Google are certainly not expensive. They trade with PEs in the low-mid 20s, growing earnings over 20% a year. Having a super asset light business model means higher dividend payout rates after they stop growing.
FB trades at a forward PE LOWER than no growth KO (whose revenue declined for 8 years). That makes absolutely no sense since Facebook is projected to grow revenue at 40% this year. Maybe the real bubble is in the low volatility “safe” stocks.
Valuations for FANGs. I don’t see how Amazon’s or Netflix’s valuations can be justified. Both are large companies that have good market-share. I think the problem with FB/GOOGL is that large corporate advertisers are now starting to re-look at their digital ad spend. AAPL is the only one that makes sense to me.
Amazon looks better when valued with a non earnings based valuation metric, like Price to Sales, but yes, I will likely never own Netflix. Not my kind of investment from a quantitative standpoint, and even in a qualitative standpoint I’m not sure how their moat will stand up over the longhaul.
While you could try to tease that out by searching for above-average gross margins within a company’s industry, I wouldn’t even try. I just mentioned brand recognition as one of a set of traits that enable a company to become a FANG-like stock. But I would not use that as the basis of a ranking system designed to find stocks that behave like FANGs. In fact, the ranking system I mentioned before uses no fundamental data, except for market cap.
You said it yourself: The key characteristic of FANGs is that they show years of consistent, market-beating returns. In other words, consistent momentum. Take FB: It IPO’ed in 2012, but fell flat. 2013 was it’s first good year: 100%+ return. If you had let momentum guide you, you would have missed much or all of that year. But at the end of 2013 you could have bought FB for $55. Good enough for a triple over the next 3 years.
To be clear: I don’t think that blindly holding the original FANG stocks today is a recipe for portfolio bliss. But I do think that it makes sense to look for other stocks that behave like they do/did, and then research those stocks’ fundamental “story” to get a sense of their long-term prospects.
Both industries are projected to grow at double digit rates for the next 5-10 years.
AMZN doesn’t care about quarter to quarter earnings. Read this to understand AMZN. You see AMZN is different from all the other guys. Bezos is a guy that is focused on long term strategic thinking. He is not about playing Wall St’s game of beating short term profit goals like other companies.
To do a sum of the parts valuation for Amazon is easy.
AWS is very profitable and grew at 42% YOY. A 40x multiple on its profits will give you around $200 billion. It’s only other competitor is MSFT and pretty much every mid and large size company will need AWS or equivalent in the future.
The online retail business does 170 billion in sales and is growing at 20% a year.
If you assume a conservative margin of 10%. That’s 17 billion in profits. Alibaba has 30% operating margins so I argue 10% is not high if AMZN tried to optimize profits and ignore reinvesting into its business. Economies of scale will also make this number easy to achieve. A 25X multiple on 17 billion gives you $425 billion.
Another 50 billion for whole foods and hits like AWS logistics/grocery delievery/alexa and future ventures.
That gives you 675 billion.
10% premium for Jeff Bezos as CEO and for a very high quality business with strong dominant moats.
You get over 700 billion.
This is the base case. Because AMZN is playing the all or nothing game, the upside is much higher than this. While the downside if things go bad may end up with AMZN worth 200 billion, I’d say the upside is about 2 trillion.
It’s not just about PEs or brand recognition but how long this business can go on making profits. I would argue AMZN is cheaper than AAPL. If you think over a 20 year horizon as which company will have higher profits then, it’d be easily AMZN. Online shopping and cloud spending is not going away. Because of current low penetration levels, these numbers can easily 5-10X over the next 20 years.
AAPL’s main problem is its market is deflationary in nature. Remember PCs use to cost a lot and they cost less now? Electronics tend to go down in price. AAPL is also at a higher risk at losing to technology disruption. In fact Samsung only trades at 5X earnings so AAPL at 14X appears fully (if not overvalued).
