Is Wall Street Tiring of the FAANG Stocks?

China

(The Motley Fool)

Despite the coronavirus disease 2019 (COVID-19) pandemic disrupting economic activity like never before, it’s been a banner year for equities. Through this past weekend, the benchmark S&P 500 was up nearly 15% on a year-to-date basis. That’s pretty amazing, considering it was briefly down by more than 30% in March.

But these impressive returns are no match for the FAANG stocks in 2020.

Facebook (NASDAQ:FB)
Apple (NASDAQ:AAPL)
Amazon (NASDAQ:AMZN)
Netflix (NASDAQ:NFLX)
Google, which is a subsidiary of Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)
On a year-to-date basis, every FAANG stock is up by between 36% (Alphabet) and 71% (Amazon).

The outperformance of the FAANGs is even more pronounced over the past decade. Whereas the S&P 500 is up by 202% over the trailing 10-year period, Alphabet, Facebook, Apple, Amazon, and Netflix are up a respective 537%, 631%, 978%, 1,700%, and 1,780% over the same stretch. Note that Facebook has only been public since 2012.

Though the FAANGs have been virtually unstoppable for a long time, there’s growing evidence that Wall Street’s most successful money managers may be tiring of the group.

Roughly 45 days after the end of every quarter, money managers with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission. A 13F provides an under-the-hood look at what securities an investment fund held at the end of the previous quarter. It’s a way of seeing what the brightest minds on Wall Street were doing with their (and other people’s) money during the previous quarter.

According to 13F data aggregator WhaleWisdom.com, big-time fund managers were big-time sellers of the FAANG stocks during the third quarter. Aggregate ownership of shares by firms and wealthy individuals required to file a 13F fell by the following percentages in Q3:

Facebook: Down 0.76%
Apple: Down 4.97%
Amazon: Down 1.4%
Netflix: Down 1.1%
Alphabet: Down 0.88% (Class A, GOOGL); down 1.89% (Class C, GOOG)
But this isn’t a one-quarter trend. Here’s what money managers did in the sequential second quarter:

Facebook: Down 0.01%
Apple: Down 5.03%
Amazon: Down 10.84%
Netflix: Down 2.13%
Alphabet: Down 1.97% (Class A, GOOGL); down 2.59% (Class C, GOOG)
And again in the fourth quarter of 2019:

Facebook: Down 11.1%
Apple: Down 4.6%
Amazon: Down 7.3%
Netflix: Down 19.9%
Alphabet: Down 10.6% (Class C, GOOG)
I didn’t save the first quarter 13F aggregate ownership data on the FAANG stocks like I usually do. Still, this is at least three of the past four quarters where Wall Street has pared down its exposure across the board to the market’s most successful industry leaders.

Why sell the FAANGs?
Why sell such seemingly dominant companies? One idea has to do with sector and industry rotation. As the FAANGs mature, it’s only natural for their longer-term growth rates to flatten. Money managers might be rotating money away from FAANGs to take on greater risk with faster-growing companies.

It’s also possible that innovations are driving money out of the FAANGs. To be clear, the FAANGs remain innovators in their own right. But technology is changing the face of the cloud, cybersecurity, healthcare, and a host of other sectors and industries. The smart money might be upping its bets on these potential opportunities.

It’s also possible that money managers are willing to take on added risk given the Federal Reserve’s dovish stance on monetary policy.

With lending rates expected to remain at or near historic lows, high-growth companies will have access to cheap capital to innovate, expand, and acquire.

No matter the exact reason(s), it’s pretty evident that the FAANGs are falling out of favor on Wall Street.

Money managers are probably going to kick themselves sooner than later.

If history has taught investors anything, it’s that betting against the FAANGs, or selling them, is a bad decision. In particular, I view three of the FAANG stocks as attractive buys right now.

Facebook continues to grow by double digits, has 3.21 billion family monthly active users, and hasn’t even monetized two of its lucrative assets yet (WhatsApp and Facebook Messenger). In other words, Facebook is the go-to social platform for advertisers, and two of the six most-visited platforms in the world have yet to be meaningfully monetized. When Facebook opens the floodgates, its sales could again skyrocket.

Alphabet is another FAANG stock investors could comfortably buy right now. GlobalStats puts Google’s worldwide internet search market share at between 92% and 93% over the trailing 12 months. Aside from significant ad-pricing power on internet search, Alphabet also owns one of the three most-visited social platforms (YouTube) and benefits from the rapid growth of cloud infrastructure service Google Cloud. Based on future cash flow, Alphabet might be the cheapest of all FAANG stocks.

E-commerce giant Amazon is also a smart portfolio addition. Amazon controls close to 39% of all e-commerce sales in the U.S., per eMarketer. Yet it’s the company’s cloud infrastructure segment, Amazon Web Services (AWS), that’ll be responsible for driving long-term growth. AWS generates considerably juicier margins than retail, and already accounts for the lion’s share of Amazon’s operating income.

The only FAANG stock I can make a genuine selling argument for is Netflix. It’s the only one of the five not generating positive annual cash flow, and its share of the U.S. streaming market continues to dwindle as deep-pocketed media players enter the space.

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