Let me start by saying that FANG stocks — Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — are always ones to buy especially on dips. The only problem is that the stock prices of this well-known bunch is out of this world. Instead of suffering during the Covid-19 crisis, they thrived. The collective has already set new all-time highs and under the toughest of conditions. Initiating new positions at these levels adds undue risk — and perhaps setups for mid-term disappointment.
Other sectors are trying hard to catch up, but they are still lagging. Last week, there were efforts to rotate into other sectors, especially banking and energy. But from the looks of how the markets closed on Friday, the Nasdaq is still the strongest, and FANG gang are its kings. They have grown into giant market caps, to the point the capitalization of two or three mega-tech companies are now bigger than whole small-cap indices.
I have been a strong proponent of today’s three stocks. Every serious dip turned into a great opportunity to buy them. Investors are trading as a collective. They latch on to a story and they work it to death, then sentiment flips and they move on to another.
From time to time it is okay to be a “sheeple,” but most often it is smarter to not chase the herd and instead find one’s own opportunities. FANG stocks are not all created equa,l but they all have stints of brilliance. The three I’m looking at today are:
FANG Stocks to Trade After the Quarantine: Amazon (AMZN)
Given me an “A” for amazing company! When people locked themselves at home, Amazon got busier than ever. It was one of few means that citizens had to buy what they needed. Mass hoarding became the norm, and doing it online was the easiest way.
Of course it wasn’t alone — this concepts extended to a select few, like Shopify (NASDAQ:SHOP).
This wasn’t just luck. Under the leadership of Jeff Bezos, the Amazon team has delivered 30% yearly growth for over a decade. As they say, “you make your own luck.” AMZN stock soared to new astonishing levels while the stock market was crashing faster than ever before. It not only recovered what it lost from the Covid-19 correction quickly, it exceeded it by 15% from low to high.
I know I sound like a perma-bull but I assure you that I am not. At this altitude, I am cautious starting longs in it. I would rather wait out this period until we learn more about how the recovery process will unfold.
I am not a hater either. In fact in early April I wrote about buying the dip in AMZN stock even while the Wall Street bounce hadn’t even started. My conviction is very strong in the bullish thesis for this incredible team, and the default direction for this stock is up. My concern here has nothing to do with the company prospects, not even from the short term. It’s the macroeconomic environment that worries me quite a bit. Investors in Amazon should temper the enthusiasm a bit for a few months.
Another company that benefited tremendously from the quarantine is Netflix. The world was stuck jobless at home with nothing better to do than binge watch media. Everyone’s new favorite way of doing this is by streaming. Netflix also made its own luck first by changing the way people rented movies, then by migrating us all online. I did not know that I was doing it all wrong until the Netflix team showed me so. They placed themselves in this position and now they are reaping the rewards.
This also is a stock to buy on dips with conviction. It too recovered the ledge from which it crashed on the shutdown much stronger than the S&P 500, but with slightly less conviction than AMZN. Nevertheless, the fans were impressive. Last week it corrected about 8% but that was a technical setup that is still unfolding. The bottom of this could extend to below $395 and maybe even to $375 and this is where the readers of this note start hating me for saying this.
But if you think about it, this merely brings NFLX stock back to the breakout neckline from mid April. It is totally normal for a stock to revisit its launching point to test it for footing. This is a fancy way of saying it would be time to buy the dip again soon. The fundamental metrics for it are never cheap, with a price-earnings ratio of 84 and the price is almost nine times its sales. Compare this to Amazon, which is only 4.1 times its sales. They are both expensive, but it doesn’t matter much in either case because great growth is never cheap.
Alphabet (GOOG, GOOGL)
This used to be my favorite of the mega-tech stocks because it delivered great growth and it had a massive moat around its core search business. But ever since the advent of the smart phone, the world got addicted to using them almost 24/7. This created a subset of mobile search and new champions emerged — like Facebook, for example. This is where the cracks in Alphabet started forming. While it is still dominant, its pizzazz has waned.
They stopped chasing new crazy ideas, and while this appeased the Wall Street folks at first, it turned the company into a boring behemoth settling for what it had already accomplished. The exception that still could make all of this okay is its involvement in self driving. Waymo could make me eat my words a few years from now, but that also is an aging story. It is starting to feel like the situation with International Business Machines (NYSE:IBM) and Watson. The company has hung its hat on it for decades and has delivered negative growth all-the-while. The Waymo project is 11 years old now and it should sprout tangible results soon — otherwise someone will beat them to the punch. Just last week we learned that Amazon is making a bid into self-driving tech via Zoox.
Don’t get me wrong. I am still a fan of Google and most of its products. I just miss the days when they wowed us. I will buy the GOOGL stock dips, but in this case I wouldn’t touch it until it falls towards $1,250 per share. This would be the weekly neckline from which it broke out in October of last year. Twice before that in the last two years the stock had also failed there hard, so it is a place of potential pivots. Both bulls and buyers will fight it out there for control again and sooner rather than later. I’d rather miss another pop than get in $250 wrong on this stock.
Of today’s three, Amazon and Netflix stocks are my two my favorites and in that order. I would trim my gains in Alphabet stock until management shows me new moves. I am a bit worried from how this economy will perform once the stimulus drugs wear out.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.