Is Wall Street Tired of FAANG Stocks?
Despite the 2019 coronavirus disease (COVID-19) pandemic disrupting economic activity like never before, it has been a record year for stocks. Over the past weekend, the benchmark S&P 500 is up nearly 15% since the start of the year. This is quite astonishing, given that it briefly declined by over 30% in March.
But those impressive returns fall short of FAANG stocks in 2020.
FAANG stocks have proven unstoppable
By “FAANG” I am referring to:
Since the start of the year, every FAANG share is up 36% (alphabet) to 71% (Amazon).
The outperformance of FAANGs is even more pronounced over the past decade. While the S&P 500 is up 202% over the past 10 years, Alphabet, Facebook, Apple, Amazon and Netflix have increased by 537%, 631%, 978%, 1,700% and 1,780% respectively on the same period. . Note that Facebook has only been public since 2012.
Although FAANGs have been virtually unstoppable for a long time, it is increasingly evident that Wall Street’s most successful fund managers can tire of the bunch.
Wall Street’s love affair with the FAANGs coming to an end?
Approximately 45 days after the end of each quarter, fund managers with at least $ 100 million in assets under management are required to deposit Form 13F with the Securities and Exchange Commission. A 13F gives an overview of the securities that an investment fund held at the end of the previous quarter. It’s one way of looking at what the brightest minds on Wall Street were doing with their money (and that of others) in the previous quarter.
According to 13F data aggregator WhaleWisdom.com, the big fund managers were big sellers of the FAANG actions during the third trimester. Overall share ownership by corporations and high net worth individuals required to file a 13F declined by the following percentages in the third quarter:
- Facebook: Down 0.76%
- Apple: Down 4.97%
- Amazon: Down 1.4%
- Netflix: Down 1.1%
- Alphabet: Down 0.88% (Class A, GOOGL); down 1.89% (Class C, GOOG)
But this is not a trend of a quarter. Here’s what the fund managers did in the second sequential quarter:
- Facebook: Down 0.01%
- Apple: Down 5.03%
- Amazon: Down 10.84%
- Netflix: Down 2.13%
- Alphabet: 1.97% decrease (Class A, GOOGL); down 2.59% (Class C, GOOG)
- Facebook: Down 11.1%
- Apple: Down 4.6%
- Amazon: 7.3% decrease
- Netflix: Down 19.9%
- Alphabet: Down 10.6% (Class C, GOOG)
I did not record the first quarter 13F aggregate ownership data on FAANG stocks as I usually do. Still, it’s at least three of the last four quarters that Wall Street has reduced its exposure across the board to the most successful industry leaders in the market.
Why sell the FAANG?
Why sell such seemingly dominant companies? One idea relates to the rotation of sectors and industries. As FAANGs mature, it is natural for their long-term growth rates to flatten out. Fund managers could divert money from FAANGs to take more risk with faster growing companies.
It is also possible that innovations will take money out of the FAANG. To be clear, the FAANGs remain innovators in their own right. But technology is changing the face of the cloud, cybersecurity, healthcare, and many other sectors and industries. Smart money could increase its bets on these potential opportunities.
It is also possible that fund managers may be prepared to take additional risks given the Federal Reserve’s dovish stance on monetary policy. With lending rates expected to stay at or near historic lows, high growth companies will have access to cheap capital to innovate, grow and acquire.
Regardless of the exact reason (s), it’s pretty obvious that the FAANGs are falling out of favor on Wall Street.
Fund managers are likely to get started sooner rather than later
If history has taught investors anything, it’s that betting against FAANGs, or selling them, is a bad decision. In particular, I consider three of the FAANG actions as attractive purchases right now.
Facebook continues to grow in double digits, a 3.21 billion monthly active family users, and has yet to monetize two of its lucrative assets (WhatsApp and Facebook Messenger) yet. In other words, Facebook is the go-to social platform for advertisers, and two of the world’s six most visited platforms have yet to be significantly monetized. When Facebook opens the floodgates, its sales could skyrocket again.
Alphabet is another FAANG stock that investors could comfortably buy right now. GlobalStats estimates Google’s global internet search market share at between 92% and 93% in the last 12 months. In addition to significant advertising pricing power over internet search, Alphabet also has one of the top three most visited social platforms (YouTube) and benefits from the rapid growth of the Google Cloud cloud infrastructure service. Based on future cash flows, Alphabet could be the cheapest of all FAANG securities.
Ecommerce giant Amazon is also a smart addition to the wallet. Amazon controls nearly 39% of all ecommerce sales in the United States, per eMarketer. However, it is the company’s cloud infrastructure segment, Amazon Web Services (AWS), which will be responsible for long-term growth. AWS generates significantly juicier margins than retail and already accounts for the lion’s share of Amazon’s operating revenue.
The only FAANG title that I can make a real selling point for is Netflix. It is the only one of the five does not generate positive annual cash flow, and its share of the US streaming market continues to decline as deep-pocketed media players enter the space.
But even with one in five potential bad apples (no pun intended), fund managers are likely to regret cutting their stakes in these large companies.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.