Despite the 2019 coronavirus disease (COVID-19) pandemic disrupting economic activity like never before, it has been a record year for stocks. During this past weekend, the benchmark S&P 500 was up nearly 15% year-to-date. 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 actions have proven unstoppable
By “FAANG” I am referring to:
On an annual basis, each FAANG stock is up between 36% (Alphabet) and 71% (Amazon).
The outperformance of FAANGs has been even more pronounced over the past decade. While the S&P 500 is up 202% over the 10-year period, Alphabet, Facebook, Apple, Amazon and Netflix are up 537%, 631%, 978%, 1700% and 1780% respectively over 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 top fund managers can be tiring of the bunch.
Is Wall Street’s love affair with the FAANG 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 file Form 13F with the Securities and Exchange Commission. A 13F gives a snapshot 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, major fund managers were big sellers of FAANG stocks during the third quarter. 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: Decrease of 0.88% (Class A, GOOGL); down 1.89% (Class C, GOOG)
But this is not a quarter trend. 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: Down 1.97% (Class A, GOOGL); down 2.59% (Class C, GOOG)
And again in the fourth quarter of 2019:
- Facebook: Down 11.1%
- Apple: Down 4.6%
- Amazon: Down 7.3%
- 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 to all market leaders.
Why sell the FAANG?
Why sell such dominant companies? One idea concerns the rotation of sectors and industries. As FAANGs mature, it is natural for their long-term growth rates to stabilize. Fund managers could divert money from FAANG to take more risk with faster growing companies.
It is also possible that innovations will result in money out of 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 accommodative stance on monetary policy. With lending rates expected to remain at or near historically low levels, high growth firms will have access to cheap capital to innovate, develop and acquire.
Regardless of the exact reason (s), it’s pretty obvious that the FAANGs are in disgrace on Wall Street.
Fund managers are likely to be kicking themselves 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 currently consider three of the FAANG stocks to be worthwhile buys.
Facebook continues to grow in double digits, has 3.21 billion monthly active users, and has yet to monetize two of its lucrative assets (WhatsApp and Facebook Messenger). 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 truly monetized. When Facebook opens the floodgates, its sales could skyrocket again.
Alphabet is another stock that FAANG investors could easily buy right now. GlobalStats places Google’s global internet search market share between 92% and 93% in the past 12 months. In addition to its significant 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 cloud infrastructure service Google Cloud. Based on future cash flows, Alphabet could be the cheapest of all FAANG shares.
E-commerce giant Amazon is also a smart addition to the wallet. Amazon controls nearly 39% of all ecommerce sales in the United States, per eMarketer. Yet it is the company’s cloud infrastructure segment, Amazon Web Services (AWS), that will be responsible for long-term growth. AWS generates much juicier margins than retail and already accounts for the lion’s share of Amazon’s operating profit.
The only FAANG stock I can make a real selling point for is Netflix. It’s the only one of the five not generating positive annual cash flow, and its share of the U.S. 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.