2015 was the year when all Talking Heads started using a new acronym FANG. And I was going WTF?! Turns out that the acronym was coined by none other than Jim Cramer, host of CNBC's Mad Money a few years ago. It refers to the most popular and best-performing tech stocks in recent memory: Facebook, Amazon, Netflix, and Google.
These silly acronyms and word games come and go. For a while everybody uses them but eventually they are forgotten. Good examples are PIIGS, Grexit, and BRICS. Typically everybody hates an acronym, but you feel compelled to use it because everybody else uses it. Herd mentality is commonplace among investors and financial advisors.
How did the FANG stocks actually perform in 2015? Shortly put, quite spectacularly:
- Facebook, NASDAQ:FB +38%
- Amazon NASDAQ:AMZN +124%
- Netflix, NASDAQ:NFLX +144%
- Google (Alphabet nowadays), NASDAQ:GOOG +48%
You could say that these companies carried the market in 2015, which otherwise was in stealth bear mode. As a matter of fact, 2015 marked the end of a six-year winning streak for the S&P500 index, as it closed -0.7% down for the year.
Indeed, the FANG stocks are heavy with a combined market cap of about $1.2 trillion! That’s a lot if you consider that the combined market cap of S&P500 companies is about $18.5 trillion. The FANG companies' exact combined weight in the S&P500 index is 5,5% at the moment. It seems clear that without these companies the S&P500 index would have ended 2015 with much worse figures.
People love to invest and play with the FANG stocks because the companies are so familiar. Or at least they seem familiar, which gives people the illusion that they know the companies. It’s true that almost everybody is familiar with the main products of the companies – and it’s generally believed that the services they provide make life easier (okay, you could argue the exact opposite too). But there’s a lot more you need to consider when making an analysis and a company valuation.
Before you invest in these stocks, remember that they are extremely volatile. Facebook for example has been a roller coaster. After the IPO in May 2012 the stock price dropped quickly from 38$ to 18$ and for a year nobody wanted to touch it with a long stick. Then, in fall 2013, the market suddenly agreed that Facebook’s mobile challenges were solved and the stock started moving upwards. It’s now trading around 103$.
Netflix has also had a bumpy ride, even though at first glance the chart below might suggest that it’s been a glorious journey from 10$ to 110$. A closer look reveals that we've had weekly moves of over 20% in either direction. Be prepared to sit tightly on your hands if you take a position in Netflix, especially during earnings releases.
To me the FANG stocks look like a classic case of a stock market bubble. All the signs are there with the hype and funny nicknames. The Talking Heads are building it up even more. Many feel that they've missed a good race in 2015 and want to jump on board now. The bubble will grow as long as there are new suckers who want to come onboard. This is known as the Greater Fool Theory. But sooner or later we run out of suckers.
The reality is that these company valuations are unrealistic and based on crazy growth expectations. It's like déjà vu all over again from the late 90's with the dot-com bubble. Also, it's been shown many times that things change very quickly in the tech industry. Who knows how attractive Facebook will be after five years?
It’ll be exciting to follow the FANG stocks during 2016 and see how long the hype can continue. Should the bubble burst abruptly it could have a severe negative impact on the overall stock market in the US.