Bigger Upside than the FAANGs

For five years now, investors have been in love with a handful of giant technology stocks. You can call them the Four Horsemen of technology – or make that five or six depending on which names you include. You can also call them by some version of the acronym they have come to be known by:

  • FANG – Facebook (FB), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL)
  • FAANG – Adding Apple (AAPL) to the above
  • FAAMG – replaces Netflix with Microsoft (MSFT)
  • FAAANG – Adds Adobe Systems (ADBE) and Broadcom (AVGO) to the original FANG

Put them all together and you get FANAGAMA.

Okay, so I’m not planning to switch careers and invent acronyms for a living, but I’m sure this particular one will get mangled through the years as other leaders emerge and the market ebbs and flows.

Whatever you call them, these stocks have been and continue to be powerhouses in terms of growth and performance. In fact, stocks in the most common grouping – FAANG – now make up more than 10% of the S&P 500, which means even investors who don’t own these particular stocks need to know about them.

Earnings season is typically a great time to get up to speed, but most investors tend to look at how the companies performed last quarter. Looking in the rearview mirror is not the way to see the road ahead. We can get glimpses of that road in the quarterly reports and conference calls, and we can also uncover smaller and lesser-known companies that may be traveling a similar path but with even bigger upside potential.

What Earnings Do and Don’t Tell Us

First, let me say that earnings season so far is rocking. Heading into this week, 95% of the 86 S&P 500 companies to report so far had beaten expectations. That’s eye-popping, and even more important from an investing point of view is how stocks have traded after earnings. So far, gains the day after earnings are reported are the best we’ve seen in two years.

Strong earnings the last few quarters is a major reason the NASDAQ hit a new all-time high again this week, and technology stocks have been leading the charge.

Two of the tech bellwethers have reported so far. Netflix was the first, and it did not go well. The stock fell on worries about subscriber growth and revenue. NFLX is now down 14% from its all-time closing high earlier in July, but keep in mind that it is still up 88% just in 2018 even after the selling.

Alphabet soared to record highs on Tuesday after its report showed continued advertising growth as well as robust growth in its cloud business. I especially like that the company is also big into research and development in future trends like self-driving cars through its Waymo division.

Profiting from the Hidden Gem

Amazon reports after the close tomorrow, and I am very interested in its report. The company has a good track record, beating Wall Street’s expectations 61% of the time and averaging impressive gains of 1.44% the day after results are released.

While everyone will be focused on the headline numbers, I am more interested in an under-the-radar portion of AMZN’s business that is experiencing huge growth. It’s called Twitch, and it is the number one streaming video service in the exploding eSports industry.

If watching other people compete at video games isn’t your thing, stay with me for a moment because the potential is huge. To put into perspective just how big Twitch is, Goldman Sachs claims that eSports will surpass Major League Baseball and the National Hockey League in viewership any day. About 167 million people worldwide currently watch eSports every month, and by 2020 that number should nearly double to 300 million viewers. This would put it in line with viewership of the National Football League, which has dominated viewership among the major sports.

Twitch is to Amazon what Instagram is to Facebook. Most investors focus on the bigger name, but the potential for the smaller businesses within the conglomerates is huge!

Does Twitch’s growth make AMZN a buy? Well, that’s a bit more complicated given the size of the company and the multiple areas in which it operates and is trying to move into. That’s why I love to hunt down smaller companies that are more pure plays on the same theme

For instance, even more exciting than Amazon and Twitch is China’s version of the latter. I devote my research to finding these types of companies – early-stage stocks with huge potential that Wall Street has yet to discover. Huya (HUYA) is a fraction of what it could be if it grows to be the size of Twitch in the coming years. The stock just began trading in the United States in mid-May, and it has run from $15 to $50 and back to $30. It’s too early to buy, but I am watching it closely for the right opportunity.

In the meantime, I recently recommended a similar stock in my Investment Opportunities service. I call it the Netflix of China. That’s the long-term goal of this company. The population of China is four times that of the U.S., so investing in companies that are dominating China’s social media, video gaming, media and internet sectors can make you a lot of money. If this company can become half of what Netflix is, it is a seven-bagger from its first day of trading earlier this year. But I see even bigger returns. In my full analysis, I told my readers that I truly believe it can grow to be the same size Netflix is today and return over 10 times your original investment in the next five years.

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