Investors have elevated the FANG stocks to rock-star status. These names are internet darlings. Search FANG stocks on Google and you’ll come up with over 6 million results. But investing in the hot stocks might not be the way to go.
After stellar returns in 2017, the FANG stocks lost steam in 2018. Find out why you shouldn’t invest in FANG stocks now.
What Are the FANG Stocks?
Here are the FANG stocks and details about their current prices, valuation and estimates:
F stands for Facebook (NASDAQ:FB). It’s currently selling for $183.78 per share with a trailing-12-month price-to-earnings ratio of 24.3. Facebook’s 52-week range is $123.02-$218.62 and its one-year projected price is $196.44.
A stands for Amazon (NASDAQ:AMZN). It’s currently selling for $1,923.77 per share with a trailing P/E ratio of 95.5. Amazon’s 52-week range is $1,307.00-$2,050.50 and its one-year projected price of $2,073.55.
N stands for Netflix (NASADQ:NFLX). It’s currently selling for $381.89 per share with a P/E ratio of 136.4. Netflix’s 52-week range is $231.23-$423.21 and its one-year projected price is $381.26.
G stands for Google, also known as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which is actually Alphabet, Google’s parent company. It’s currently selling at $1,264.55 per share with a P/E ratio of 28.9. GOOG stock’s 52-week range is $970.11-$1,273.89 and its one-year projected price is $1,352.50.
The FANG stocks have been internet favorites due to their increasing market share and explosive growth. But whether these internet stars will continue outperforming is debatable as their growth slows, competitive forces increase and regulations creep in.
Beware of a Frothy Market
The markets are into the tenth year of a running bull market. The current S&P 500 Shiller P/E or CAPE ratio of 31.08 is nearly double historical average of 16.61. This P/E metric compares the current S&P 500 index price with the 10-year average earnings per share (adjusted for inflation) to smooth out fluctuations in the business cycle data. Using the P/E ratio valuation, the overall market is pricey.
After a quick scan of the one-year price estimates, you might think each of the FANG stocks has room to grow. Facebook even sports a modest (for tech stocks) P/E ratio of 24.3 and Alphabet’s is a lowly 28.9.
In contrast, the valuations of Amazon and Netflix are sky high with P/E ratios of 95.5 and 136.4 respectively.
So, does this suggest that Facebook and Alphabet are undervalued? Not necessarily. There’s a reason for their low-ish valuations. The FANG stocks face headwinds from many directions.
The FANG Sizzle Is Burning
Beware of the sizzle. There are regulatory and competitive attacks approaching the FANG stocks. Amazon, Google and Facebook are subject to the EU rules targeting unfair online ranking platforms under the Platform-to-business (P2B) law. In 2017, Google was penalized with a 2.42-billion-euro ($2.7 billion) EU antitrust fine — and it was hit with another, this one 1.5 billion euros, earlier this year. Investigations are aggressively searching for unfair trade practices.
Facebook and Google’s data privacy practices are also under fire. CNIL, the French data protection watchdog, recently fined Google 50 million-euro ($56.33 million) for failing to provide users clear information regarding data use policies.
Meanwhile, Netflix faces rampant competition from new streaming services along with growing debt.
Then there’s presidential hopeful Elizabeth Warren threatening to break up the FANG stocks.
Investors love high-flying growth, but the bulk of that explosive expansion may be in the rearview mirror for these tech players. If so, then the FANG stocks will be expected to grow at the same rate as the market.
What’s a FANG Follower to do?
If you can’t quell your love of FANG, keep a small position or go with a fund that includes FANG stocks. Fortunately, due to their large market cap, any diversified U.S. stock fund will provide FANG exposure. For a more concentrated position, The First Trust Dow Jones Internet Fund (NYSEARCA:FDN) is a market-cap-weighted fund that tracks the performance of the Dow Jones Internet Index.
Finally, maintain a diversified investment portfolio, across U.S. and world assets, in line with your risk comfort level. This research-supported investment approach is diversified and likely to match market returns and minimize investment volatility.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com , a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com . Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she does not hold a position in any of the aforementioned securities.