As a growth manager, I’m always looking for stocks that have the potential to make big moves. The FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) have been great winners over the past 5-10 years but no longer provide that potential.
They are too big, over-owned, and most importantly, their growth is slowing. I’m not saying to sell them. I’m not saying to short them. I’ve just met too many people who think these stocks are going to go up forever, and investors need to be open-minded that they might be dead money for a while.
A lesson from the ‘90s
To get a better perspective, let’s look at a similar historical analogy. Back in the decade of the 1990s, Dell, Microsoft, Intel, Oracle, and Cisco all experienced tremendous moves. This period was known as the PC revolution. Dell was the leading computer manufacturer, Microsoft put the software on those computers, Intel put the chips inside, Oracle was the predominant database company, and Cisco connected all of this together. When I say “tremendous moves,” these stocks went up 30,000%-75,000%, but keep in mind they came public at much lower valuations than companies do today. For example, Cisco went public in 1990 with a market capitalization of $224 million and Facebook went public in 2012 with a market cap of over $104 billion. Their longer term charts show that after stocks make big moves, they need time to consolidate, correct, and simply digest their gains. Here are a few examples:
Charts are provided by MarketSmith.
The main reason these stocks didn’t make any progress for many years is that their earnings and sales growth slowed down. They didn’t go out of business; they simply became dead money for a while. Dell went private in 2013 (and is now public again) but over the years, the other four stocks attracted value investors because they have strong cash flows and started paying dividends. Currently, Apple is the only FAANG stock that pays a dividend, but it wouldn’t surprise me if the other four eventually do the same. The following charts show the slowdown in growth in the FAANG stocks. Google is the only one to show an uptick in earnings and sales growth in their most recent quarterly report.
Charts are provided by MarketSmith.
FAANG is likely to be dead money for a while. Investors need to keep an open mind that stocks need time to consolidate after making big moves. If the market continues higher, these stocks could perform in-line, but I am not expecting the strong gains going forward like we’ve seen in the past. Of the five stocks, I think Netflix probably has the best growth potential, which is ironic because it’s the least owned and most hated of the FAANG stocks. I currently have no position in any of the FAANG stocks, as I would rather focus client money on stocks that are in their earlier stages and provide better growth opportunities.
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