With sector rotation in full swing, investors have been rotating to value stocks instead of growth stocks. Where the market winds blow next is anyone’s guess. Here’s what I do know: the market won’t truly get going again until the FANG stocks turns things around.
“FANG,” of course, is an acronym for Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). They’re four of the largest and most influential tech companies in the world, and arguably the four best growth stocks of the last decade (along with Apple (AAPL), which occasionally gets included in the group, thus making them FAANG stocks).
Average return among the four commonly accepted FANG stocks over the past decade? +1,658% (and note that Facebook stock didn’t come public until May 2012).
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Average loss among the FANG stocks since the beginning of May, when the market started to encounter turbulence from which it has yet to recover? -9.8%. Google stock is the only one of the four that’s actually up during that span – just barely.
Let’s take it back even further.
FANG Stocks vs. The Market
Since January 22, 2018, the day the S&P 500 peaked before the first of two significant market corrections that year, the index has barely budged; it’s up a mere 2.3% in more than 21 months.
Here are the returns in the FANG stocks during that 21-plus-month span:
FB: -5.8%
AMZN: +23.3%
NFLX: -0.73%
GOOG: +2.6%
That’s an average gain of 4.8% – double the return in the S&P, but a pittance compared to how the FANGs (and, not coincidentally, the market) performed over the previous 21 months. And, of course, most of those gains were in Amazon stock, which speaks well of AMZN as sort of an all-weather growth stock.
The FANGs no longer have the same kind of growth potential they had a decade ago, or even five years ago. All four have likely surpassed peak investor perception, which means a fall was inevitable. But they’re still among the most financially solid and revolutionary companies in the world. They still hold plenty of sway on Wall Street. And each one of them is expected to grow sales by double-digits both this year and next.
Eventually, their share prices will get going again. It’s impossible to know when. But when they do, you can be sure that it will be in conjunction with – or perhaps a major reason for – the next market rally.
Of course, new market leaders have emerged. Cabot’s Mike Cintolo does an outstanding job identifying the growth stocks that are helping drive the market in his Cabot Growth Investor advisory, which has beaten the market handily for the last decade-plus. But Mike is also brutally honest about when to keep your powder dry and hold plenty of cash, and now is one of those times; his Cabot Growth Investor portfolio currently holds a 54% cash position.
Here’s a portion of what Mike told his subscribers about the current environment in his latest update:
“Looking ahead, it’s important to keep an open mind. In fact, we actually think there’s a decent chance we’re in the midst of the third (and final) leg down in this five-plus-month rolling market correction—May came out of nowhere, August marked the top of many growth stocks, and now some out-of-the-blue bad news items (possible capital controls, impeachment, manufacturing recession) have many throwing in the towel.
“Of course, we’ll just take things as they come. At day’s end, the predominant trend of the major indexes has been sideways, and the onus is on the buyers to step up and produce some persistent buying pressures (not just a day or two) and upside breakouts.”
Take Your Cues from the FANGs
Perhaps the breakouts that matter most are in Facebook, Amazon, Netflix and Google, all four of which have been in a five-month malaise, similar to the overall market. The FANGs won’t stay down for long – they never have, at least not since the 2008-09 recession. Unless we’re on the doorstep of another recession (possible, but the Federal Reserve probably won’t let it happen yet), they’ll start to show signs of life soon enough.
When they do, take it as a buy signal.
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