In recent weeks, the stock market has been extraordinarily strong. Stocks seem to move higher on good news and churn sideways when the newsflow turns negative. This price action is consistent with a market that remains under accumulation primarily driven by underexposed and underperforming fund managers.
There is a possibility that this move higher could continue for many months if the fundamentals improve and ratify the bullish price action. Recent articles have explored parallels between this advance and previous ones. However, one notable difference this time is the underperformance of 'FANG' stocks.
FANG Stocks
Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Netflix (Nasdaq: NFLX), and Google (Nasdaq: GOOG) comprise the 'FANG' stocks. For much of this bull market, these stocks have outperformed in nearly every metric such as share price appreciation, revenue growth, earnings growth. Further, these stocks have huge market capitalizations and are extremely liquid, making them excellent vehicles for institutions.
Investing in these stocks has been very profitable over the past decade. Although they started off with exorbitant valuations, these stocks are a rare example of optimism paying off as they reached the lofty metrics embedded in their valuations. For example, Facebook had a price to earnings ratio in the triple and quadruple digits in its first couple of years of trading. Currently, its P/E ratio is around 31. Although the company's stock grew over that time period, its profits grew even more.
Negative Divergence
This same story has played out across all 'FANG' stocks. Previously when the broader market bottomed and turned higher, they were leading to the upside. Coming out of the Great Recession, stocks like Netflix, Amazon, and Google made new all-time highs in late 2009 or early 2010. In comparison, the S&P 500 (NYSE: SPY) didn't reach a new high until 2013.
The same thing happened during the previous major bottoming event for the stock market in 2016 when stocks in this group broke out well before broader indices. Therefore, it's worth paying attention that this time, 'FANG' stocks are not leading. They are lagging and remain range-bound despite the strength in major indices.
The three major reasons behind their underperformance are increased political risk, slowing momentum, and increased competition. In a sense, the remarkable success of the 'FANG' group is working against them. They are attracting political scrutiny from both sides of the aisle given their market share and outsized influence. It's quite possible that antitrust actions could begin at any time against Facebook, Amazon, or Google, and it would be a rare political act with bipartisan support.
The success has also attracted competitors from outside and within the group. Increased competition leads to higher costs, decreased revenue, and lower margins. Overall, these have translated into slowing momentum for these companies in terms of revenue growth and margins.