Are The FANG Stocks Dead?
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Are the FANG stocks dead? Or, to be clear, are the MANNGMAT stocks dead? Of course, we are talking about the big technology heavyweights of Meta Platforms (NASDAQ:META), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), NVIDIA (NASDAQ:NVDA), Google (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA). According to a recent article via the WSJ, such seems to be the case. To wit:
In the short-term, it certainly seems that value investors, after more than a decade of underperformance, are finally taking a victory lap as the long-awaited resurgence occurs. The value trade was something we wrote about extensively in 2020, as many believed
The chart below shows the annual performance difference between the Vanguard Value and Growth Index funds. The surge in value in 2022 is unsurprising as investors look for a “ to hide as markets stumbled.
Value-Vs-Growth-Performance-Pct-Change
The brief periods of outperformance of value versus growth occurred during rough patches in the financial markets. However, as the following chart shows, there is a massive performance gap between value and growth.
Value Vs Growth Fund Price
Since 2008, much of that remains attributable to three primary factors – FANG stocks, buybacks, and passive investing.
Buybacks & Safe Havens
We have previously discussed the impact of share buybacks on the overall market.
- 21% from multiple expansions,
- 31.4% from earnings,
- 7.1% from dividends, and
- 40.5% from share buybacks.
“
SP500-Decompostion Returns Buybacks
Of course, most of those “share buybacks” were concentrated in the largest market-capitalization stocks with the free cash flow, or borrowing capacity, to affect those transactions. For example, Apple has repurchased more than $500 billion of its shares. But these buybacks occurred across the entirety of the FANG complex to help boost share prices higher.
Not surprisingly, with earnings under pressure due to higher interest rates, companies have announced a record of more than $1 trillion in buybacks for this year.
Buyback Authorizations
Importantly, what theseprovide to FANG stocks is an Therefore, when asset managers are looking for a to hold capital, the FANG stocks were the stocks of choice. Such was because they maintained a high level of liquidity, and the buybacks provided a ready buyer when needed. Such allowed asset managers to quickly move hundreds of millions of dollars in and out of positions without substantially impacting the price.
Investors should not readily dismiss the impact of share buybacks. As John Arthurs previously penned.
In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their shares, there have been effectively no other real buyers in the market.
However, another aspect of the FANG stocks remains vital to their future performance.
It’s A Function Of Passive
The top-10 stocks in the S&P 500 index comprise roughly 1/3rd of the entire index. In other words, for every $1 that flows into a passive S&P 500 index, $0.31 flows into the top 10 stocks.
Top-10 Mega Cap Stocks
Currently, roughly 2165 ETFs are trading in the U.S., with each of those ETFs owning many of the same underlying companies. For example, how many passive ETFs own the same stocks comprising the top 10 companies in the S&P 500? According to ETF.com:
In other words, out of roughly 2165 equity ETFs, the top-10 stocks in the index comprise approximately 20% of all issued ETFs. Such makes sense, given that for an ETF issuer to you a product, they need good performance. Moreover, in a late-stage market cycle driven by momentum, it is not uncommon to find the same “best-performing” stocks proliferating many ETFs.
One of the reasons that FANG stocks may not be going forward is the same reason they were the leaders in the past. Despite the market decline this year, investor capital flows are still headed into passive funds.
Active vs Passive Flows
Of course, as investors buy shares of an ETF, the shares of all the underlying companies also get purchased. When the bearish market cycle reverses, the increase in flows into passive ETFs will push those FANG stocks higher along with the market.
Disinflation May Be The Catalyst
As we head into 2023, there is one final reason why FANG stocks will likely perform much better than many currently expect –
In a disinflationary/deflationary environment, particularly in an economic recession, investors seek out companies with sustainable earnings growth rates. While many of the FANG stocks have come under pressure as of late due to “disappointing” earnings and forecasts, it is worth noting the earnings growth rates of these companies remain high over the next 3-5 years, according to Zacks Research:
You get the idea. The point here is that the impact of higher rates on economic growth will lead to a disinflationary environment. However, it isn’t just interest rates weighing on the economy but the extraction of the massive monetary injections over the last two years that fostered the inflationary surge. The reversal of the money supply, which leads the inflation measure by about nine months, suggests inflation will fall sharply next year.
M2 vs CPI
As investors seek out investments with sustainable earnings growth rates in a slowing economic environment, many FANG stocks will garner their attention. Combine that focus with the inflows from passive investors when the market cycle turns, ongoing share buybacks, and the liquidity needs of major investors; likely, FANG stocks will still find some favor.
Does this mean they will perform as well as they have in the past? No. They could underperform other assets in a disinflationary environment, like bonds, where yields fall sharply.
The point is that investors should not dismiss FANG stocks entirely because the media says they are It is worth remembering many said the same about Energy stocks in late 2020. Of course, that was just before that outperformed everything else in the market.
