Investing in FANG Stocks
These Stocks Rule the High-Tech Roost
If you ask any stock expert worth his or her salt—or saltiness, in this case—Jim Cramer is to picking stocks what the Hillary Clinton campaign was to sound election strategy. As the host of CNBC’s “Mad Money,” Cramer may be loud and somewhat fun to watch. And yes, the Harvard grad who once ran his own hedge fund comes through from time to time in a big way. But a good number of Cramer’s picks have been so horrendously, stupendously wrong that it’s a wonder he can claim the title stock pundit.
Consider that at one point, Cramer predicted the fall of Bear Stearns, only in exact reverse. On March 11, 2008, he responded to an investor’s concerns with typical Jim Cramer brio: “No! No! No! Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear.” And of course, Bear Stearns stock fell 92 percent three days later on news of a Fed bailout and $2-a-share takeover by JPMorgan Chase & Co. (JPM). Short of a company disintegrating altogether, it doesn’t get worse than that.
What to do for an encore, then? In April 2015, Cramer published his list of 49 “Buy Right Now” stock picks. That’s a hefty number that you’d assume would give Cramer the advantage of a balanced portfolio during a robust market. So what happened?
David England, a now retired associate professor of finance at John A. Logan College, conducted an experiment to see what would happen if someone invested $1,000 in each one of Cramer’s picks.
And six months later, England revealed that he’d “lost” money on 67 percent of Cramer’s picks. Cramer’s picks vs. S&P over the same period: minus 7.8 percent. The total loss? $4,500.
And yet Cramer, once a reporter, has given the investment world at least one memorable contribution that says something of his journalistic creativity: He coined the term FANG stocks, guaranteeing that investment writers would forever owe him some small debt of gratitude.
In fact, the FANG stock grouping may represent one of the best barometers of investment health among high-tech’s heavyweights. But just what are the FANG stocks anyway, and why should they matter to investors hoping to build a robust portfolio?
Simply, FANG is an acronym that represents four stocks: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and the onetime Google, now Alphabet (GOOG, GOOGL). So should you want to get technical, FANG is now FAAN, and some contend that a third “A” belongs to that grouping: Apple (AAPL). The stocks all trade on the NASDAQ exchange and between them represent every crucial area of public-facing high tech. These include but are not limited to:
- social media
- video streaming
- virtual reality
- consumer electronics
- driverless cars
- mobile technology
At this point, you’d have to be a hermit not to come into contact with the FANG companies (we’ll use the acronym as a stand-in for the five stocks listed above) in your everyday life—often simultaneously. As I write this story, I’m pounding away on an Apple MacBook Pro with my Google Chrome browser open to the Google search engine. When I need a break, I’ll post an update on Facebook, or maybe cruise over to Amazon to order a book on my list.
As for Netflix, I subscribe because it’s a lot cheaper than cable TV, which I don’t have.
Give how the FANG companies have found such a lasting place in people’s lives in such a short time (Netflix, for example, didn’t even exist until 1997), it’s no wonder people have gotten excited as to their future prospects. Every member of the FANG posse has become a force for strong returns. Consider FB, for example, which this year alone has shot up 50 percent and now trades at more than $170 per share.
And yet, as the go-to source Investopedia notes, FANG stocks don’t come without their dangers. “Although they have consistently delivered positive returns, some analysts believe that these tech stocks are a mirror image of the tech stocks that delivered similar momentum prior to the dotcom crash.” To that end, investor exuberance might be driving share prices to unhealthy levels, with enthusiasm outpacing solid company returns.
Here’s a quick look at each of the FANG stocks:
When Facebook went public in May 2012, it sold for $38 per share. By July 2013, it had dropped to $25.88, and many began to wonder whether Facebook wasn’t ready for prime time on the NASDAQ. And then, the social media giant began an upward climb and hasn’t looked back since. Wherefore the huge comeback? For starters, there’s been lots of excitement over Facebook’s ability to monetize web presence for advertising. On top of that, Facebook has been buoyed by some stellar acquisitions that have increased its user base, the most prominent of which is Instagram—now at 700 million users as of April. And with its latest quarterly earnings report, Facebook passed the mighty Amazon in worth, with a market cap now flirting with $500 billion.
As high-tech CEOs go, Amazon founder Jeff Bezos is driven on a level that borders on a one-man club. Not content with simply displacing mom-and-pop merchants via e-commerce, he’s opened brick-and-mortar Amazon stores, with one in the middle of Chicago’s Southport Street strip, a brash move considering it's home to many independent merchants. And Amazon’s move in June to purchase Whole Foods for $13.7 billion in cash, it stands "primed," if you will, to expand its already-huge distribution base while revolutionizing the way groceries are ordered and delivered. Yet some joke that $13.7 billion is equal to a shopper’s yearly grocery bill at “Whole Paycheck,” while Amazon’s ongoing moonshot with drone delivery has yielded more wisecracks than results. But go ahead, giggle: Every time you order through his website, Bezos laughs all the way to the bank. AMZN is the e-commerce giant to beat, if anyone can beat it.
Let’s face it: the death of Steve Jobs also put to rest Apple’s days as an innovator of exciting new tech products. But that hardly has Apple shareholders singing the iBlues, as current CEO Tim Cook has dibs on something better: a money making machine. Up more than 40 percent over the last 12 months, AAPL now trades at about $150 per share, and its status as the world’s largest technology company is undisputed. Its current market cap is just a hair below $780 billion, and AAPL was named the world’s most valuable brand by Forbes—a crown it has held for seven straight years. To be sure, Apple suffered a high-profile failure in its Apple Watch, and there’s ample evidence its iPhone line has hit a wall of consumer fatigue. Yet the latter could be in part seasonal, as the April-June period has been Apple’s weakest every year since the company settled into September iPhone launches in 2012. Meanwhile, a potential September release this year has blockbuster potential, as it will mark the 10th anniversary of the smartphone that changed the world.
Unlike any of the other FANG stocks, Netflix lives and dies by subscriber numbers. On the one hand, that’s good news, as many consumers disgusted with soaring cable TV fees have decided to “cut the cord” in favor of its video streaming service, which at present costs between $7.99 and $11.99 per month—less than a first-run movie ticket. Yet how long can it continue to grow its subscriptions? Nervous investors have asked question every single quarter for years. Penetrating into untapped global markets isn’t a given and the headline of a May article in Vanity Fair carried a rather alarmist prediction: “Now That You’re Hooked, Netflix Is Looking to Raise Its Prices Again.” Blame it on the potential for weekend “surge pricing,” a slick strategy ousted Uber CEO Travis Kalanick made famous. But so far, so good: In July, NFLX reported that it added 5.2 million members, far beyond the 3.2 million Wall Street predicted. Since then, its stock has shot up 12 percent and currently trades at $180. Wow: That’s almost as much as some monthly cable bills.
Alphabet (GOOG, GOOGL)
Who would’ve thought a search engine started by two Stanford University graduate students, and that began its life as BackRub, would turn into the Internet’s 648-ton gorilla? That number, multiplied by one billion, represents Alphabet’s market cap—and places it as the only contender in any sort of position to displace Apple as the world’s most valuable company (which it did, briefly, in 2016). You’d have to be a combination high-tech luddite, end-times prophet and market mega-bear to see anything but blue skies for Alphabet in the decades to come. Hmmm, let’s see: Without hardly missing a beat, GOOGL (a class A stock that comes with voting rights) has risen 1,644 percent since it went public in 2004. Assuming you’d held the stock from then until now, your $5,000 purchase would be worth about $87,500 today. Meanwhile, the non-voting GOOG (class C) tracks pretty closely, up 1,619 percent over its history. Driverless cars, YouTube, the Android smartphone platform, a strong presence in schools across the nation, the highly-praised Pixel phone: What doesn’t Alphabet going for it these days?
If there’s any stock that deserves more than just an honorable mention here, it's Microsoft (MSFT). Perhaps considered too nerdy for this well-heeled, cool tech cabal, it’s more than proven its worth of late thanks to the savvy acquisitions of Skype and LinkedIn, along with its stellar leadership in the cloud-computing sphere. Over the last year, its stock has surged by more than 28 percent; it now trades at more than $72 per share.
Now adding a sixth stock to the FANG mix might not seem like the most practical idea, at least from the acronym standpoint. With Apple included and Google’s name change factored in, you wind up with FAMAAN—which sounds an awful lot like “famine,” and hardly fitting when you consider the feast these stocks have bestowed on their grateful shareholders.
You don’t need a wannabe investment guru to tell you that some, if not all, of these stocks deserve a serious look. But maybe the acronym does.
Better get Cramer.