Bubble Ahead

A Sector Shows its FANGs, By Mike Larson, 11/5/15, Money and Markets

Market Roundup Dow 17,863.43 (-4.15)   S&P 2,099.93 (2.38)   NASDAQ 5,127.74 (-14.74)   10-YR Yield 2.25% (+0.02)   Gold $1,103.30 (-$2.90)   Oil $46.34 (-$0.87)

The “FANGs” are sinking their teeth into the wild-eyed imagination of profit-hungry investors.

I’m talking about Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and the company formerly known as Google (GOOGL), but now called “Alphabet.” These high-flying stocks have gotten so popular with investors that they’ve earned their own pithy acronym.

Just consider: In a year where the broad averages have basically gone nowhere, Facebook has risen more than 33%, Alphabet has jumped 42%, Amazon.com has surged 106%, and Netflix has soared 133%. Punch up a longer-term chart, and you’ll see Facebook has jumped by a factor of five since the end of 2012. Netflix has exploded more than 14-fold.

What’s driving these gains? Several factors:

The rapid shift toward mobile-and-broadband-based social networking, advertising, media viewing and commerce.

The desire for more on-demand services and programming delivered straight to your high-definition television or tablet, or quick delivery of packages right to your front door.

The shift toward cloud-based technology services in corporate America and around the world.

Shares of Amazon have soared, along with other FANG stocks.                               

Each of these trends has captivated investors both institutional and individual, and attracted huge inflows to FANG shares. In fact, Facebook hit a record high today after it reported earnings per share excluding items of 57 cents. That beat the average forecast of 52 cents. Sales came in at $4.5 billion, compared with forecasts of $4.37 billion. Monthly active users topped expectations at 1.55 billion, while 78% of its ad revenue came from mobile-based marketing. That was up from 66% a year earlier.

So where do these stocks go next? Well, so far incredible revenue growth has inspired investors to snap up FANG shares despite periodic quarterly disappointments. They’ve also been willing to overlook the gigantic bills for acquiring richly valued businesses.

Facebook paid $1 billion for Instagram in 2012 when the photo-based social networking site basically had no revenue. It also spent $22 billion to buy the messaging company WhatsApp in 2014, when it had 50 employees and roughly $10 million in annual sales.

For its part, Amazon.com has been shelling out billions of dollars to build the infrastructure for its cloud-based data services and its product-delivery business. It hasn’t made money during the key holiday-shopping season in a half-decade, though it said it would actually operate in the black this year.

Price to earnings ratios haven’t been an obstacle, either. Alphabet is the “stodgy” one of the bunch, with a 12-month trailing P/E of just under 37. Facebook trades at about 105 times earnings, while Netflix goes for 302 times profit. As for Amazon, it sports a P/E of – get this – 929!

No doubt these companies are dominating their industries and capturing investor interest. I suppose it’s just a question of how much you want to pay for that. We clearly haven’t seen momentum wane yet, so if you’re on board, enjoy your profits.

What do you think? Are FANGs a buy, sell, or hold here? Do you own any of these stocks — and why or why not? Will they be able to spur broader market gains, even as many other sectors, stocks and asset classes are lagging as I’ve highlighted before? Do you have other favorites in the sector? Hit up the Money and Markets website and share your thoughts when you have a chance.

Our Readers Speak

What’s next for the economy? Is privatized mail service a positive or negative? And do we really want a more consumer-focused China after all? Those are some of the issues you were discussing online in the last 24 hours.

Reader Chuck B. said this with regards to the economy: “Our trade deficit shrank 15% in September from the August level, as imports shrank by 1.6%. Does this indicate retailers are preparing for a lower holiday shopping season? Possibly so, since jobs are drying up, as shown by the lower hiring figures, and the large layoffs in many large companies over the year.”

Reader D. also sounded a cautious note on growth: “The GDP numbers from 2015 and 2014 are being revised down, so the fantabulous jobs numbers for those years will also be revised down. Pay attention to the Atlanta Fed’s GDPNow project, which tracks this stuff closer to real-time. It’s projecting 1.5% real growth or lower for this year. It has a better track record than the conventional methods, which have a laborious, dragged-out revision process.”

With regards to the Japan postal service sale, Reader Charles said: “Yes I would buy shares if the U.S. government would actually take their hands off. They continue to cut it loose, then take control again. Given the opportunity to make profits and keep them, they certainly have demonstrated in times past that they can make a profit as a business.”

Lastly, on the goal of a consumer-driven rather than manufacturing-based economy, Reader Caine offered this perspective:

“You know, everyone speaks of the ‘transition to a consumer-based economy’ as if it’s the Holy Grail. Sorry to be a Negative Nancy, but is buying more junk good for the economy or the soul over the long haul? What if we were an ‘infrastructure, education, and research-based economy’?

“We might grow more slowly, but we might have better values, grow in a sustainable way, avoid soar/crash cycles, and more. I’m a capitalist from the word ‘go,’ but don’t believe that consumer growth is the be-all or end-all.”

Thanks for those insights, and I hope you keep ‘em coming. An economy needs balance, and countries that generate too much of their growth from one industry or another are vulnerable in the long term. My fear with regards to China is that the messiness associated with its transition away from manufacturing isn’t over, and that will lead to more market turmoil over the coming quarters.

But I’m always open to differing opinions. If you haven’t shared your thoughts yet, please take a moment to do so using this link.

Other Developments of the Day

● The epic merger mania wave over the past couple of years has enriched Wall Street, but it continues to claim victims on Main Street. Newly merged Kraft Heinz Co. (KHC) said it would slash 2,600 jobs and close seven factories in a cost-cutting move tied to its $46 billion deal. The goal is to save $1.5 billion per year once the moves are completed by 2017.

● Didn’t we just have a major BEAR market in China? Now, it’s supposedly a BULL market again?

My head is spinning, but as the Wall Street Journal notes, threatening to arrest stock sellers, handing out cheap money like Halloween candy, and cutting interest rates have now officially helped pushed China’s Shanghai Composite Index up 20% from its August low. Is it sustainable? History and logic say “No.” But I guess we will see.

● Concerns are growing that Metrojet Flight 9268 may have been brought down by an ISIS-planted bomb. All 224 passengers and crew died when the airplane broke apart in midair, scattering debris over several miles of Egypt’s Sinai Peninsula. The investigation is continuing, but U.S. and U.K. officials are starting to lean toward the terrorism explanation.

● Expedia (EXPE) is buying HomeAway (AWAY) for $3.9 billion. in cash and stock. The move will make it easier for customers to access listings of private rooms, apartments, and homes for rent if they’re looking for an alternative to traditional hotel rooms on vacation.

So what are your thoughts on the latest round of merger-related job cuts? Do you believe terrorism is responsible for the latest airplane tragedy, and are other airlines vulnerable? What do you think of renting private property on vacation, rather than a traditional hotel room? Hit up the website and share your thoughts when you get a chance. Until next time,

Mike Larson

Source: Money and Markets