What are 'FAAMG Stocks'?

FAAMG is an abbreviation coined by Goldman Sachs for five top-performing tech stocks in the market, namely, Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google.

FAAMG originated from the original acronym FANG, which was coined by CNBC’s Jim Cramer. FANG did not include Apple and Microsoft but did include Netflix. The new variation of the biggest tech companies does not include Netflix because of its relatively small market capitalization compared to the other five companies in FAAMG.

Another variation, FAANG, includes Netflix in place of Microsoft.

BREAKING DOWN 'FAAMG Stocks'

Approximately 3,000 companies (mostly tech companies) trade on the NASDAQ, and the Nasdaq Composite Index , which indicate how the tech sector is faring in the economy. Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOG)  accounted for 55% of the NASDAQ’s year-to-date (YTD) gains as of June 9, 2017. In addition, FAAMG stocks accounted for 37% of the returns of the S&P 500 index, which tracks the market capitalization of 500 large companies across various industries trading on the NYSE and NASDAQ.

Each of the stocks in the FAAMG class is in the top 10, by market capitalization, of the S&P 500 index. Although the five stocks are only 1% of the 500 companies in the index, they make up 13% of the market value weighting in the S&P 500. Since the S&P 500 has widely been accepted as the best representation of the US economy, it follows that a collective upward (or downward) movement in the stock performance of FAAMG will most likely lead to a similar movement in the index and the market.

For example, on June 9, 2017, shares of FAAMG companies slumped following a report from Goldman Sachs cautioning investors not to use these stocks as safe havens. FB, AMZN, AAPL, MSFT, and GOOG fell by 3.3%, 3.2%, 3.9%, 2.3%, and 3.4%, respectively, by the end of the trading day. In turn, the NASDAQ fell almost 2%, and the S&P 500 was down 0.08%.

FAAMG are termed growth stocks, mostly due to their year-over-year (YOY) steady and consistent increase in the earnings they generate, which translates into increasing stock prices. Retail and institutional investors buy into these stocks directly or indirectly through mutual funds, hedge funds, or exchange-traded funds (ETFs) in a bid to make a profit when the share prices of the tech firms go up.

As of June 9, 2017, while the S&P 500 had gained by 8.5% YTD, the worth of each company that composes FAAMG increased by over 30%, except for MSFT and GOOG, which were up 16.7% and 24% YTD, respectively, beating the market benchmark index. The 13-F filings for the first quarter of 2017 saw notable hedge fund managers increase their holdings in FAAMG. Since FAAMG stocks have consistently beaten the market over the years, adding these stocks to a fund’s portfolio could increase the chances of generating a high alpha for the fund.

Is There an FAAMG Bubble? 

FAAMG has been likened to the tech stocks that were prevalent in the market before the2000 tech bubble burst. Historically, growth stocks have higher volatility than the market due to their risky ventures. However, FAAMG stocks have a valuation with unusually low volatility, which is reminiscent of the pre-dotcom crash tech stocks. While analysts, notably from Goldman Sachs and UBS, have expressed doubt in the continued low volatility of the tech giants, they agree that these tech stocks in the digital era still have plenty room to grow as they delve into new technological ventures in machine learning, big data, cloud computing, social media, video streaming, artificial intelligence (AI), block chain and e-commerce systems.

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