FAANG Stocks: Long, Short, or Neutral

FAANG is an acronym, which stands for the first letters of the five companies Facebook, Apple, Amazon, Netflix, and Alphabet’s Google. These five companies have not only been some of the best-performing large-cap stocks over recent years (although Netflix only qualified as large-cap in 2013, when its capitalization consolidated above the $10 billion threshold), they have defined a zeitgeist, led a roaring bull market, and changed the way many of us live, at least in the world’s more economically developed countries. Although FAANG is seen as a group of technology stocks, Netflix and Amazon stand out as not really fitting within this classification, being a member of the Consumer Discretionary and Consumer Cyclical sectors respectively. They have all been enormously successful, and produced spectacular returns for investors, especially over the past four years. All are household names, yet only Apple has really been very well-known historically, originally making its name with the Macintosh computer before its then-CEO, Steve Jobs, became synonymous with the smartphone. The last few years have seen Google consolidate and expand upon its position as the world’s premier search engine, Facebook capture one-third of the world’s population into its social media network, and Amazon crush most of its real-space retail competition as it expands sales of goods far beyond books and CDs.

All five of the FAANG companies have been members of the benchmark S&P 500 Index for some time, but one of them (Netflix) is not a member of the larger-cap S&P 100 Index, so it is most suitable to use the S&P 500 as a benchmark to measure their performances. The FAANG stocks comprise just under 12% of the index’s total market capitalization. The past four years is an appropriate relative performance window exhibit, in case you are new to stocks and are wondering what all the fuss is about:

The outperformance of the index by an equally weighted basket of FAANG stocks has been stunning, with the FAANG equally-weighted basket returning 227.05% compared to the index’s 52.58%. Turning to the individual stocks themselves, here are their results over the same period, compared to the basket:

Where are the FAANG Stocks Now?

Turning from the past to the future, what might be next for the FAANG stocks? Are FAANG stocks still a buy? Checking out the prevailing market conditions followed by a fundamental analysis of the respective companies should start to give us an answer. Starting with the wider market, there is still a bull market in stocks by any measure of any major index, but we’ll stick with the S&P 500 as mentioned. The Index is up over 6 months and 12 months, its 50-day moving average is above its 200-day moving average, and it has not fallen by more than 20% from its all-time high price. The Index suffered a sharp correction at the start of February 2018, but quickly bounced back to recover more than half of the value of the drop. A look at a long-term price chart shows a succession of major higher lows. These signs all confirm a bullish outlook on the general market. On the other hand, there are two signs which can be argued to be bearish. Firstly, volatility has spiked dramatically, with the 20-day Average True Range more than doubling from 18.17 just before the correction started, to a level of 39.10 less than one month later. Such a volatility spike is often seen at the end of bull markets. Secondly, the correction was the steepest drop since before the current leg of the bull market began. Markets are rarely black and white, so overall it is probably fairest to say we still have a bull market in stocks, but at maybe 60% to 70% speed compared to the 100% speed it was running at in January 2018.

Market Sector & Industry Analysis: Momentum

The next step is to break down the performance of the market by the relevant sectors and industries. Using a 6-month look back period, we can see that the Information Technology Sector (which includes Facebook, Apple, Google) is the strongest performer of all sectors, very closely followed by the Consumer Discretionary Sector (which includes Amazon and Netflix). This suggests that there is strongly bullish momentum behind the FAANG companies, and that they are still the “leading shares in leading market sectors” which conventional wisdom says you should be buying in a bull market. Yet if we look more closely at a list of the strongest-rising shares over this same 6-month period, the situation is not quite so strong. Only two of the FAANG companies are in the top 50 best performing large-cap stocks: Netflix up 69.26% in 19^th place, and Amazon up 59.00% in 26^th place. If we examine the more recent 1-month performance, the situation is a little better: Netflix up 28.19% in 4^th place, and Amazon up 14.86% in 18^th place. This suggests that in terms of a pure two-timeframe momentum analysis, Netflix and Amazon look like buys. In terms of the smoothness of the upwards movement, which is a metric used by many hedge funds in stock selection, typically measured by exponential regression analysis and R squared, Amazon is superior to Netflix at the time of writing.

Fundamental Analysis

Most long-term investors would wish to make a careful company by company analysis before adding any stock to an investment portfolio, and entire books have been written about the process. Some researchers have concluded that if you had to restrict fundamental analysis to a single easily available and definite metric, price-to-book ratio would be the superior choice. Price to book ratio measures the ratio of the current market price to the company’s total assets minus liabilities, so in theory, the lower the better. Here are the values at the time of writing for the FAANG stocks:

Although Netflix and Amazon look like potential momentum buys, on a major fundamental metric they look overvalued. It is interesting to note that Apple, Facebook and Google are all well under the index ratio, suggesting that while the gains might be less spectacular, they could be steadier long-term investments. Long-term investing should not be undertaken without careful study of the companies’ revenue models and analysis as of the relevant industries and competitors. Is Facebook’s monetization model under long-term threat from a movement to grant users ownership of their data? Does recent data showing a decrease in popularity among teenagers suggest Facebook is becoming passé to the young? What will Apple do with their enormous reserve of cash? Could Google’s prime position as the world’s favorite search engine come under threat? These questions, and many more, should be carefully considered by long-term investors. Of course, the more stocks you have in your investment portfolio, the less you must worry about the precise prospects of each individual company. Don’t forget that you can get exposure to FAANG stocks without owning them directly, through ETFs and various index, sector and industry trackers.

Day Trading FAANG Stocks

It is usually not a wise idea to day trade stocks at all unless they are leading stocks in a very strong bull market. This is because stocks are typically extremely volatile and subject to intraday manipulation by market makers. Day trading instruments such as Forex is usually much safer, giving the trader a better chance to make a profit. Don’t forget that stock CFDs usually have relatively high spreads at even quality CFD brokers and holding them overnight will incur fees that will eat into profit enough to prevent it being a feasible method of investing in FAANG companies. If you are going to day trade FAANG stocks, doing it long only when both the broader market indices and the stocks themselves are making new all-time highs is going to give you the best chance of success. Yet a much better approach to making money from the stock market is usually found in investing in a portfolio of several stocks and rebalancing no more than once per month.