The great appeal of a grouping of stocks like the FAANGs (Facebook (FB) - Get Report, Apple (AAPL) - Get Report, Amazon (AMZN) - Get Report, Netflix (NFLX) - Get Report and Google/Alphabet (GOOGL) - Get Report) is that they make the investment process simple. Just buy those leading names and watch the gains roll in.
In recent years, the great bulk of gains in the indices has been produced by this small number of stocks. According to studies by Ed Yardeni, the four original FANG names (Facebook, Amazon, Netflix and Google/Alphabet) have outperformed the rest of the S&P 500 by about 400% since 2012.
This is far from a new phenomenon. Every era has had a small group of stocks that have been primary leaders, and the smart move was to just park money in those names and let them run for years.
In the early 1900s, these leading stocks were primarily railroads like Union Pacific and Atchinson, Topeka, and Santa Fe. Western Union and Sugar Refinery Co. were also wildly popular names.
During the Great Depression, names like Container Corporation, Bulova Watch and Zenith Radio were the "go to" names for the investors that survived the crash of 1929.
In the 1950s, a group of stocks called the Nifty Fifty were the stars of the market. This list changed quite a bit over the next few decades but included Xerox, McDonald's, Coca-Cola, IBM, JC Penney and Polaroid. The recession of 1973-74 ended this era when Disney (DIS) - Get Report fell 82% from its highs, and Xerox dropped 70%.
Following the internet bubble in 1999-2000, Jim Cramer wrote an article for New York Magazine in which he highlighted five stocks that he expected to be the new market leaders in 2005.
"Portfolios once filled with Cisco and Dell and Microsoft and Intel and EMC will abound with Google, eBay, Research in Motion (BlackBerry), Qualcomm, and Yahoo, all hugely successful companies with fat bottom lines,” Cramer wrote. “The acronym GERQY, for the above-named companies, will become common parlance as investors brag to each other at parties how early they got into the phenomenon.”
These stocks worked well for a while and were adjusted, but in 2013 Cramer recognized a new, more enduring set of winners, which he deemed FANG for Facebook, Amazon, Netflix and Google. In 2017, Apple was added to the acronym, and it became FAANG.
These five core names have remained, but I've adjusted it recently to FATMAAN with the addition of Tesla (TSLA) - Get Report and Microsoft (MSFT) - Get Report as those two stocks have attracted the same level of attention as the other members.
4 Key Takeaways
The history of these leading names is fascinating, but there are a number of important investing lessons to be learned:
1. All great stocks have a limited period of time when they produce exceptional gains. It may occur over the course of decades, but the hypergrowth phase does not last forever. The stocks may remain very strong performers, but they will not appreciate to the same extent they once did. For example, Coca-Cola (KO) - Get Report and Microsoft went through periods of about 15 years without making a new high. Eventually, they broke out again, but the money in those stocks was dead for a long time if you bought at the wrong time.
2. Innovation was the death knell for many of the giants of the past. Yahoo, Burroughs Computers, Western Union, and even General Electric (GE) - Get Report were not able to adapt as technological changes favored new enterprises. In retrospect, it is easy to see why railroads and coal mining eventually fell out of favor, but it is hard to imagine how an Apple or an Amazon might not be the shining stars a decade from now. The point is that investors very seldom see how innovation will impact the stocks that have treated them so well for so long, but we need to take a hard look at how growth can continue at the same pace.
3. Even the greatest stocks will suffer some substantial falls along the way. Since 2004 Apple has suffered at least four drops of 40% or more, and Avory & Co estimates that its shares will suffer a drop of about 30% every 2.8 years. Apple is more volatile than many other stocks, but with hypergrowth comes higher volatility. A stock like Coca-Cola has not been nearly as volatile in recent years, but it also doesn't offer the same level of growth.
4. Picking the great leaders is easy in the rearview mirror, but predicting which stocks will be the next FAANGs is tremendously difficult. Warren Buffett has said that there are maybe twenty great investment opportunities in a lifetime. He did well finding those ideas many years ago, but it is a daunting challenge for the average investor to look ahead and try to determine what names will be the next Apple, Facebook or Amazon.
Many of the FATMAAN names still look like they will be leaders for years to come, but the lesson of history is that new leaders with better growth will undoubtedly emerge. To produce exceptional gains, it is necessary to constantly watch for new themes, innovation and economic shifts.
Which to Buy Now?
The obvious question now is which of the FATMAAN names are likely to continue to be leaders as the others fail to continue at the same pace. The answer to that question will depend to a great degree on the ability of these companies to continue to innovate.
Apple, for example, is estimated to see nearly 50% eps growth in the FYE Sept. 2021, but after that, current estimates are for growth of just 4% in FYE Sept 2022. Apple has become increasingly cyclical due to the product cycle of the iPhone, and that is why its trailing price-to-earnings (PE) ratio of 28 is the lowest in the group.
Amazon is estimated to grow its earnings at a bit more than 30% in both 2021 and 2022 and trades with a trailing PE of 61. AMZN has always seemed like an expensive stock, but it consistently outperforms estimates, which is what keeps it moving higher.
Facebook has historically had the best valuation of the FATMAAN names based on its numbers. Currently, it is looking at 34% earnings per share (EPS) growth in 2021 and 17% in 2022, with a trailing PE of 29.
Tesla is the star as far as EPS growth goes, with 100% growth predicted in 2021 and 48% predicted in 2022, but it trades with a trailing PE of 204. Any misstep will likely hit the stock price hard.
On a valuation basis alone, Facebook is probably the best of the group with strong growth at a reasonable valuation. And technically, the stock is pushing at all-time highs and has the best relative strength versus the other names, although Google is a close second.
Unfortunately, picking which of these names will perform the best in the future is not as simple as looking at the numbers or analyst estimates. The key question is which names will be best able to innovate to keep growth at the highest level. That is why a stock like Tesla has so many fans.
Based on the numbers, I'd likely go with Facebook and Google but based on the potential for future innovation and growth, it is hard to bet against Amazon, which seems to constantly find new ways to expand its business.
James "RevShark" DePorre is a regular contributor to Real Money, TheStreet’s premium site. Click here to learn more and get great columns, commentary and trade ideas from Jim Cramer, Helene Meisler, Stephen Guilfoyle and others.
At the time of publishing, DePorre had no positions in any of the stocks mentioned in this article.
Facebook, Apple, Alphabet, Amazon, Microsoft and Disney are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.