My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

FAANG+M - These Stocks are (Still) Killin' It!

Updated: Nov 1, 2020

I last wrote about the #FAANG + M stocks on February 5th, and you can find that article here. In case you are not familiar with the acronym, “FAANG” refers to #Facebook, #Apple, #Amazon, #Netflix and #Google (#Alphabet), and the “M” is #Microsoft. My last article on these infamous six companies was written before the global equity markets were hammered by the massively negative economic effects associated with the then-unfolding #COVID-19 pandemic. I think an update is in order since the equity market has been on a remarkable journey since February 5th. Perhaps unsurprising to many of my readers, the notorious #FAANG+M stocks have continued to outperform the S&P 500 and many other stocks throughout this crisis. The incredible performance of these six stocks demonstrates their strength, laying bare their dominant competitive positions, leading technologies, forward-thinking management teams and defensive characteristics (in varying degrees). Why have these stocks performed so incredibly well?

Firstly, let’s look at just how relevant these companies are in the S&P 500 index. Collectively, the market capitalisation of these companies, based on yesterday’s closing share prices, is $5.81 trillion. The market capitalisation of the S&P 500 is $25.23 trillion (source: MarketsInsider), so the FAANG+M stocks collectively accounted for 23% of the market capitalisation of the S&P 500 index as of yesterday’s close. This is even more incredible when you consider that these same six stocks were 19% of the index at the end of 2019, illustrating how they have appreciated in value whilst the S&P index has declined since then. Related, three of the companies – Microsoft, Apple and Amazon – have market values in excess of $1 trillion, and Alphabet (Google) is knocking on the door with a market value of $959 billion as of yesterday’s close.

Secondly, these six stocks have collectively outperformed the S&P 500 index rather significantly over the last 10 years, as the graph below illustrates:

The average annual return over the 10-year period (Jan 1, 2010 to Dec 31, 2019) for the market-weighted FAANG+M has been 21.8%/annum, and the similar return over the same period for the S&P 500 index has been 9.2%/annum, excluding dividends and management fees (the case throughout the discussion in this paragraph and the following one). Needless to say, the return differential has been considerable. To provide an absolute perspective, every $1 you had invested in market-cap weighted FAANG stocks at the beginning of 2010 would now be worth $8.12 (at yesterday’s close), whilst a similar dollar invested in the S&P 500 index would only be worth $2.34.

Realising of course that Netflix had a fairly remarkable growth trajectory the first half of this period and Facebook did not go public until May 18th, 2012 (and hence was not in the weighted-value FAANG calculation until then), I also looked at average annual returns for the last five years only. The five-year average returns for each of the FAANG+M collectively and the S&P 500 index over this period (2015-2019) are 23.5%/annum and 6.7%/annum, respectively. On an absolute basis, $1 invested in the market-cap weighted FAANG+M on the first day of 2015 would be worth $3.20 today, whilst a similar amount invested in the S&P 500 index would only be worth $1.34.

Thirdly, even if you had owned fewer than all six of the FAANG+M stocks, you still would have had positive returns this year because all six stocks have had gains, as this graph illustrates:

The bottom line in the graph above – the dark blue one – is the S&P 500 index, the only line that is below 1.0 for the year (S&P 500 index down 9% YtD).

The table on the left contains the closing 2019 prices, the price as of yesterday’s close, and the percentage change of each of the FAANG+M stocks. Perhaps not surprising, the two most significant “beneficiaries” of the COVID-19 pandemic have been Netflix and Amazon, both “stay at home” companies, and the worst performers (relatively speaking) have been the more advertising-dependent companies Facebook and Google (Alphabet).

Lastly, aside from Netflix, the FAANG+M companies are all extremely strong companies from a credit perspective. Facebook has no debt at all, and consequently, is not rated, three have at least one rating in the AA category (Amazon, Apple and Alphabet), and one – Microsoft – has a very rare Aaa/AAA rating, the highest possible credit rating from both Moody’s and S&P (and a higher rating from S&P than the United States!). These five mega-technology giants are also extremely liquid, with cash and marketable securities at the end of the most recent fiscal quarter ranging from $49.4 billion (AMZN) to $137.6 billion (MSFT). Only two of the companies – Apple and Microsoft – pay dividends (and as an aside, also periodically buy back shares). Netflix is an outlier in terms of its size and creditworthiness, but it is important to say that over most periods, Netflix has been the relative outperformer even though its risk profile is significantly different than its peers.

The table below contains a profile for each of the six companies, which you can compare to the similar table included in the February 5th article.


Conclusion

The FAANG+M stocks have shown their strengths over many years, but never more so than in the recent #COVID-19 inspired market downturn and the recovery since March 23rd.

Disclaimer: I have owned in the past and currently do own all of the stocks mentioned in this post, but do not currently own NFLX.

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