Impeachment is a big, scary word. It sounds childish to describe it with such simple adjectives, but ultimately, it's true. The idea of the President of the United States, the leader of the free world, essentially being fired is one that is difficult to wrap one's head around. This is especially the case for investors who've seen political issues inspire volatility in the market for years now. When House Speaker Nancy Pelosi announced that she was opening an impeachment inquiry, the market's first reaction was a negative one. The Dow fell triple digits and the S&P 500 closed the day down nearly 1%. Jim Cramer recently referred to the impeachment process as a "PE lowering event." Uncertainty is never good for markets, yet in this case, I think the political circus that is likely to play itself out in our nation's capital over the impeachment issue can be really bullish for big-tech names like Alphabet (GOOGL) - Get Report and Facebook (FB) - Get Report .
Looking For A Safe Haven
Global trade concerns have weighed on the major market averages for months now and one of the big concerns for the market is that the impeachment process will result in a lame duck Congress that will put trade agreements, like the USMCA, in jeopardy. Law makers have said in recent days that the trade talks will continue throughout the impeachment proceedings, yet bipartisan deals seem more unlikely now than ever.
One would imagine that with so many trade tensions tainting market sentiment, investors nervous about economically sensitive assets would flock towards secular growth stories that would experience a relatively slight impact. This is the type of environment that big-tech used to thrive in. However, when FANG -- Facebook, Amazon, Netflix and Google parent Alphabet -- began to be demonized by Congress it lost some of its safe-haven status.
In recent years, I think the divide between the two parties of the American political system has widened. Throughout the Trump administration's time in the White House, there have been very few things that both sides of the political aisle agree about. However, something that both Democrats and Republicans appeared to agree on was that the rising power that corporations in Silicon Valley possess is an issue that needs to be addressed. Congress recently requested data from Amazon (AMZN) - Get Report , Facebook, Alphabet regarding recent merger activity as a part of an anti-trust probe. And Facebook CEO Mark Zuckerberg met with President Trump last week to discuss potential internet regulation. These headlines have caused the FANG names to lose some of their luster.
But, assuming that political gridlock in Washington D.C. increases as both parties hunker down for a knock-down, drag-out fight over the White House, I suspect that the Trump investigations will cause the crosshairs that have put on big-tech to shift. I wouldn't be surprised to see the regulatory pressures recently placed on names like Facebook and Alphabet ease in the short-term.
This will allow investors to focus on things like sales growth and free cash flows rather than congressional hearings and anti-trust concerns. This bodes well for Facebook and Alphabet because the fundamentals of these two companies remain attractive.
Not All FANGs Are Created Equally
I've always dividend the FANG group into two parts with Facebook FB and Alphabet GOOGL on one side and Amazon AMZN and Netflix (NFLX) - Get Report on the other. Facebook and Alphabet generally trade with attractive valuations that are easily justified by their underlying fundamentals. Amazon and Netflix have traditionally traded with much more speculative valuations due to their underwhelming bottom-line results.
Facebook's trailing twelve-month earnings per share is $6.73. That represents a ttm price-to-earnings ratio of 26.7 at the company's current $180 share price. This may seem expensive at first glance, but considering that analysts expect to see Facebook produce earnings growth of 53% in 2020 and another 18% on top of that in 2021, the company's forward looking multiples are quite cheap. Furthermore, Facebook has generated more than $15 billion of free cash flow during the last year. The company's free cash flow has increased by nearly 5x during the last 5 years.
In short, this isn't your typical speculatively valued, high-growth tech name that trades with a sales multiple because it can't turn a profit. Facebook is highly profitable with strong sales growth and high margins and an attractive balance sheet that most conservative, value-oriented investors would be interested in.
Alphabet is not growing its cash flows quite as fast as Facebook, but it has increased FCF by 4x during the last 5 years. Obviously, that is nothing to scoff at. Alphabet generated more than $27 billion in free cash flow during the trailing twelve months and nearly $50 in earnings per share. These earnings represent a 25x ttm P/E multiple at Alphabet's current $1,242 share price. Analysts are expecting to see EPS growth in the mid-teens moving forward, resulting in attractive forward looking P/E and PEG ratios.
Ignore the Noise and Focus on the Fundamentals
Even if the House moves to impeach, I think it's likely that the Republican controlled Senate will acquit President Trump. In other words, when all of this is said and done, it's likely that the impeachment proceedings will be more of a political sideshow than anything else.
Remember, the market rallied by double digits during the Clinton administration during the process that saw him impeached by the House but acquitted by the Senate. Looking back at the long-term charts, we see that the S&P 500 rallied nearly 30% from the time that details began to emerge about Clinton's affair with Monica Lewinsky and the ultimate Senate acquittal.
That process took about a year to play out and while I don't expect to see the major averages to rally another 30% from their current levels, which are already near all-time highs, over the next 12 months or so, I do think history can serve as a guide to provide solace to investors who are concerned about the market's potential reaction to the recent political news.
The past cannot be counted on as an accurate predictor of the future. This is a lesson that is taught in investing 101. However, I think another basic investing principle should be followed during these volatile times: ignore the noise and focus on high quality companies with attractive valuations and improving fundamentals.
Doing so will remove fear and greed from the equation and those two variables, more than anything else (including impeachment headlines) are what ultimately lead towards subpar returns.
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Nicholas Ward is long FB, GOOGL, and AMZN.