What does FANG mean and why should investors care?
FANG is an acronym made from the names of four tech stocks—Facebook, Amazon, Netflix and Google—that led the US stock market in 2015. Yet as the accompanying charts show, the idea that these four stocks simply “led” the market is a major understatement.
When equity investors talk about market leadership, they are generally referring to market breadth—in other words, how many stocks participate when the market moves higher or lower? These movements, which can be broad-based or narrow, are carefully scrutinized by technical analysts. In general, analysts are hoping to see a large number of stocks moving up or down—this equals good breadth—to confirm new highs or new lows and help them gauge the market's direction.
The narrow leadership in 2015 gave rise to the term FANG as shorthand for the four stocks that significantly outperformed the overall market. This “FANG phenomenon” raised the concern of an unhealthy market with an unhealthy outlook, since narrowing breadth is often the sign of a market nearing its peak. As a result, many analysts were not surprised when stocks headed lower earlier this year—and the FANGs joined the downward trend.
What do falling FANGs mean for investors?
Over my multiple decades as a technology investor, I have seen many configurations in the distribution of stock performance. My experience tells me that we have all seen this movie before: In the last few years, we've witnessed sentiment-driven risk-on/risk- off shifts as the market changed from a low-volatility, relatively complacent one to a higher-volatility market; we’ve also seen a gradual increase in stock market dispersion.
Yet even as sentiment swings wildly during these market shifts, investors can filter through the noise by keeping three key points in mind:
- Fundamentals eventually matter a great deal, regardless of shorter-term swings in sentiment.
- Accelerating company earnings ultimately translate into share-price performance.
- The technology sector, by definition, is rich with new growth opportunities.
The last point is a particularly important one when judging the prospects of FANG stocks. As high-tech advances render former methods of operation obsolete, entirely new industries have emerged—and the FANGs are textbook examples:
- Consider how the digitization of music and videos dramatically changed the delivery of entertainment content—and how Amazon and Netflix captured these high-tech shifts and turned them into growth opportunities.
- Since Facebook’s founding just 12 years ago, the company built a user base of more than 1 billion people and captured the world's attention with its ubiquitous social media platform.
- Google dominates the search business and, through its subsidiary YouTube, is the leader in Internet video.
- Amazon dominates two other major areas: Amazon Web Services is the global leader in the “cloud computing” mega-trend, and Amazon is the global leader in e-commerce.
Clearly, it’s hard to get too negative on the outlook for FANG stocks. At the same time, many investors have learned the painful Wall Street lesson that “trees do not grow to the sky”; even fast-growing businesses eventually mature. When that happens, companies reach their market potential and their growth rates decline—a process that is likely affecting the FANG complex.
Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
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