Why The FAANGs' Big Gains May Be Far From Over

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)

Some investors take the approach that if a stock is up a lot, then it must be overvalued. Investing isn't quite that easy. Sometimes just because a stock is up, say, 53 percent over the past 52 weeks like Facebook Inc. (FB) is, idoesn't mean the stock is expensive or it is time to trim it out of your portfolio. (See also: Why It May Be Time to Trim the FAANGs.)

One could make a substantial argument that stocks like Facebook, Alphabet Inc. (GOOGL), Apple Inc. (AAPL) and Microsoft Corp. (MSFT), four of the six FAAMG or FAANG stocks, are still cheap at current valuations because their fundamentals and consumer demographics are still growing. 

Demographics are shifting, and the way people are using products offered by Facebook, Apple, Alphabet, and Microsoft could be making them the consumer staples of the 21st century that even a recession can't sidetrack. After all, do you spend more timing washing your clothes and dishes or using your iPhone to check Facebook or your email on Outlook or Gmail? 


GOOGL data by YCharts

Low Valuations

FB PE Ratio (Forward 1y) Chart

FB PE Ratio (Forward 1y) data by YCharts

Looking at stocks like Facebook, Alphabet, Microsoft, and Apple, we find their valuations are cheap with one-year forward PE's in the low-to-mid-20's. Meanwhile, slower-growing consumer staples such as Coca-Cola Co. (KO), Clorox Co. (CLX) and Procter & Gamble (PG) are trading at the same forward multiples.

 Growth Rates

Fundamental Chart Chart

It comes down to this, would you

Fundamental Chart

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Would you rather own Facebook's expected revenue and earnings growth rates of 25 percent and 23 percent in 2019? Or would you rather own Clorox and its revenue and earnings growth of 3.1 percent and 4.5 percent?

Surely, you would rather own Facebook's growth rates, but with the stock price up 53 percent over the past 52 weeks, it has to be trading at some sky-high valuation right? Wrong. Facebook trades at 23 times one-year forward earnings of $8.22, while Clorox trades at 24 times one-year forward earnings of $6.37. When adjusting for growth, you can easily see how much more expensive Clorox would be over Facebook. 

Risk To Growth

There are always risks when investing, and it is evident that higher-growth companies like the FAAMNG's carry a higher level of risk than the current consumer staples. But high-growth companies also offer the most significant upside potential when things are going right. To this point, the U.S. economy appears to be strong, with two back-to-back quarters of GDP growth north of 3 percent, while the Atlanta Fed's GDPNow is estimating fourth-quarter growth at 2.7 percent. 

We just do not know what consumers will value more in a mid-21st-century recession: bleach or the news feed. At least with the news feed, consumers will be able to share their emotions about the recession. What satisfaction will they get from a bottle of bleach? 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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