Retail Investors Sell FAANGs, Buy Cannabis After $800 Billion Rally

Over the last three months, the collective market value of the mega cap FAANG tech stocks has risen by about $800 billion, but retail investors are selling, Bloomberg reports. “Taking profits isn’t the worst idea in the world,” as Joe “JJ” Kinahan, chief market strategist at discount brokerage firm TD Ameritrade told Bloomberg. He added, “What it makes me wonder is, they were the momentum stocks, so where do we get our new momentum?”

Cannabis-related stocks are providing some of that new momentum. Kinahan says that his firm's retail clients are buying Canadian marijuana stocks Canopy Growth Corp. (CGC) and Aurora Cannabis Inc. (ACB), as well as U.S pharmacy chain CVS Health Corp. (CVS), which will offer cannabis-derived products in more than 800 stores.

Meanwhile, despite being net buyers of stocks in both February and March, TD Ameritrade clients reduced their holdings of four FAANG members in March: Facebook Inc. (FB), Inc. (AMZN), Apple Inc. (AAPL), and Netflix Inc. (NFLX). These stocks have been strong performers in 2019, as detailed below.

FAANGs That Retail Investors Are Selling

(YTD 2019 Performance Through April 9 Close)

  • Facebook, +35.5%
  •, +22.2%
  • Apple, +27.0%
  • Netflix, +36.3%
  • S&P 500 Index (SPX), +14.8%

Sources: TD Ameritrade, as reported by Bloomberg; Yahoo Finance for pricing

Significance for Investors

Investors worry that big tech stocks like the FAANGs cannot maintain torrid growth rates indefinitely, per an earlier Bloomberg report, especially given a global economic slowdown. Meanwhile, the lofty valuations of these stocks make them highly vulnerable to earnings or revenue disappointments, leading some investors to conclude that they are too risky to own right now.

Nonetheless, despite these concerns, the consensus among stock analysts is that all five FAANG members, including both the four listed above and Google parent Alphabet Inc. (GOOGL), are worthy of buy ratings and price targets substantially above their current prices, as reported by Yahoo Finance. This remaining optimism apparently has driven enough buying action to propel these stocks upward.

In any case, investors should not view the FAANG stocks as a group. They have different business models, markets, risk, and levels of maturity and growth, as Shawn Cruz, manager of trader product and business strategy at TD Ameritrade, told Markets Insider.

Meanwhile, investors looking for the next big theme are focusing on the fast-growing market for cannabis products. Recreational use has been legalized in Canada and in some U.S states. CBD, a non-intoxicating cannabis compound, is appearing in a rapidly expanding number of nutritional supplements, personal care products, and beauty aids. The table below indicates how the CBD stock plays mentioned above have performed this year.

Cannabis-Related Stocks Retail Investors Are Buying

(YTD 2019 Performance Through April 9 Close)

  • Canopy Growth, +55.4%
  • Aurora Cannabis, +77.6%
  • CVS Health, -17.4%

Sources: TD Ameritrade, as reported by Bloomberg; Yahoo Finance for pricing

While scientific research on CBD has a long way to go, it is being touted for a variety of benefits. In an extensive report, investment banking firm Cowen Inc. projects potentially explosive growth ahead. Cowen sees particular potential for online sales of CBD products, and believes that is well-positioned to become a leading player. A cannabis-related ETF also has turned in market-beating performance, per CNBC.

Looking Ahead

An old adage in investing is that "trees don't grow to the sky," so uninterrupted growth for the FAANGs is unlikely. On the other hand, whether the current enthusiasm for CBD products represents a passing fad or a lasting opportunity remains to be seen.

e last year; however, as we learned from the banks, that risk is fading in the short-term as investors use lower interest rates to refinance short-term debt and access the equity in their homes to supplement rising wages.

Retail companies that provide their own financing could be especially interesting in the current market environment. For example, AutoZone (AZO), KarMax (KMX), and Rent-A-Center (RCII) are typical of the kind of stocks that should benefit from the combined demand for consumer financing and spending. Financing and credit providers like PayPal (PYPL), Berkshire Hathaway (BRK.A/BRK.B), and Discover Financial Services (DFS) will also add to their winning streak if the remaining bank and real estate reports continue as expected.

Bottom Line

I expect that earnings news from all sectors will dominate the press and determine the overall direction of the market for the rest of this month. However, what we have learned from some of the early reports indicates that consumer borrowing behavior will lead to outperformance among retail, housing, and financing stocks. The flow of capital into these sectors could easily make up for short-term slowing in industrial stocks and emerging markets. Investors with a view of the long-term will certainly want to be alert to any changes in delinquency rates, but, in the short-term, the profit opportunities appear very promising.

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