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The stock market proved to be virtually impossible to stop from its bottom in March 2009. Apart from a few minor flops, the 122-year-old stock market has Dow Jones Industrial Average and wide base S & P 500 more than quadrupled from their stockings. However, the real star of the show was the heavy technology Nasdaq Composite, which has more than quintupled from its March 2009 lows to record levels this year.
At the top of the charge for the Nasdaq are the so-called stocks of FAANG – this is Facebook (NASDAQ: FB), Apple (NASDAQ: AAPL), Amazon.com (NASDAQ: AMZN), Netflix (NASDAQ: NFLX)and Google, which is now part of the parent company Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). Originally, this group was simply called "FANG", without Apple. But it's pretty hard to exclude the king of technology when it comes to market-leading growth stocks. Thus, the acronym updated "FAANG".
Source of the image: Getty Images.
FAANG stocks are licking
The reason why FAANG shares hold so much attention from Wall Street and investors, aside from their large market capitalizations, is because they are leaders. They have outperformed the broadly-based market fairly steadily for the past decade, and their leadership is seen as critical to advancing the stock market. In fact, the FANG shares (excluding Apple) were at the origin of half of the cumulative gains of the S & P 500 index during the first week of the year. August 2018.
However, since they peaked this summer or early fall, FAANG's actions seemed to be, to a certain extent, defeated. Until Monday, November 19th, here is what market value has been lost by each of the actions of FAANG:
- Facebook: $ 209 billion lost
- Apple: $ 226 billion lost
- Amazon: $ 263 billion lost
- Netflix: $ 67 billion lost
- Alphabet (Google): 176 billion dollars lost
Add to that and we expect a total loss of $ 941 billion in total market capitalization since these companies reached their record highs of the day. That represents a value of nearly $ 1 trillion, erased in a few months.
Source of the image: Getty Images.
Why did FAANG's actions lose their sting?
What the hell has happened, ask yourself? It seems that several factors weigh on these main growth stocks.
For starters, investors tend to have very clear expectations for sales and / or profit for FAANG shares. Therefore, when one or more of them do not meet these expectations, the group tends to be bulldozed by Wall Street. In recent months, Wall Street has been skeptical of a number of these FAANG shares after their quarterly results.
For example, Facebook had its worst day as a public company in July, losing about a fifth of its value at the time (about $ 120 billion). The impetus was given by the release of the company's second-quarter operating results, which showed increased spending, slower than expected sales growth and a drop in the number of users in Europe. It was an unusually bad quarter for Facebook, and Wall Street let it know.
Since the poor quarterly results of Facebook, we have seen the publication by Amazon and Apple sales forecasts for the holiday season considered mediocre by Wall Street, which affected both actions. Alphabet, although less affected as hard, also disappointed investors with higher traffic acquisition costs, which led to a loss of consensus in the third quarter.
Source of the image: Getty Images.
Secondly, emotional and / or historical factors may be at stake. Investors know full well that nothing goes straight up and that FAANG shares have largely outperformed the wider market for a decade. Although Netflix's most recent operating results reflected strong growth in subscribers, Netflix also withstood its heights. The withdrawals are healthy and it's been a while since the actions of FAANG have been collectively corrected.
Third, blame the economy. Although the idea may seem stupid, things are almost too good right now. US GDP growth reached its highest level in almost four years in the second quarter; the unemployment rate is at its lowest level in 49 years; and US companies have benefited from a considerable tax cut due to the adoption of the law on tax reduction and reduction in December 2017. But, the market being Looking to the future, investors may find it hard to see how things are going better.
The shares of FAANG traditionally trade a premium for one reason: their superior growth. But if interest rates continue to rise, borrowing becomes more expensive, which could slow down the expansion of businesses. Low unemployment rates also mean that workers have greater wage-setting power, resulting in higher costs for businesses of all sizes. And in terms of corporate taxes, most of the savings have already been made, leaving investors wondering where the next catalyst will come from.
Source of the image: Getty Images.
FAANG shares: Mostly less expensive than they have ever been (in terms of cash flow)
Let us be clear: I am in favor of a good withdrawal of all actions, even from the market leaders. Since their highest level, shares of Facebook, Apple, Amazon, Netflix and Alphabet have respectively decreased by 40%, 20%, 26%, 36% and 20%. And, in the case of stocks that traditionally are not fundamentally cheap, most indicators are clearly heading in the right direction.
For example, Amazon has never done much to maximize its profits. It is rather a company that seeks to generate as much operating cash flow as possible, which is then reinvested in its existing activities and new ancillary projects. Over the last five years, Amazon's average price / cash flow ratio has been 30.4. However, according to Wall Street, Amazon is in the process of generating a cash flow of 147.90 USD per share by 2021. This would place it at a multiple of less than 11, which, given its propensity to reinvest in his business would make it incredibly cheap. according to historical norms.
As for Facebook, it has been established at an average price over cash flow of 31.7 over the last five years. Still, on Wall Street, the company is generating a cash flow per share of 12.47 USD by 2020, which would also place it at a multiple of less than 11 times the cash flow per share. Facebook seems to be a good deal.
The only question mark of the group is Netflix, which continues to generate annual cash outflows rather than cash inflows. On the positive side, profits will double from 2017 to 2018, then almost double again in 2019, then double again by 2021 – at least according to Wall Street. If Netflix can continue to reach the number of subscribers, investors may be able to forget its spending habits.
In other words, this "development" can be an opportunity for shopping.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Suzanne Frey, a senior member of Alphabet, is a director of The Motley Fool. Sean Williams has no position in any of the actions mentioned. Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook and Netflix. The Motley Fool offers the following options: Long calls from $ 150 to January 2020 for Apple and short calls from $ 155 to January 2020 on Apple. Motley Fool has a disclosure policy.
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