The Optimists Were Right About FANG Stocks

The Stars Are Born

In February 2013, television personality Jim Cramer popularized the name “FANG” stocks for four top-performing technology issues—Facebook META, Amazon.com AMZN, Netflix NFLX, and Google GOOGL. (As Facebook and Google have since changed their names, the current acronym would be MANA. Not so catchy.)

Most experienced investors scorned those securities. They viewed glamour stocks as for the young and impressionable. Among the corporations mentioned in three bestselling books published from 1982 through 2001 about how organizations should be managed, In Search of Excellence, Built to Last, and Good to Great, there were twice as many future stock market flops than big winners. Moreover, academic researchers Eugene Fama and Ken French had shown that, over more than half a century, value stocks had thrashed their better-known rivals.

Besides, it is psychologically easier to invest in humdrum organizations that are unburdened with high aspirations than it is to ride growth-stock roller coasters. Old-line businesses rarely make the market headlines, but if they are well run and their industries sound, they can turn a tidy long-term profit. One reason why dividend-paying stocks have become so very popular is that they are comfortable to own. Will they make more money over time than other equities? Unclear. But it’s pleasant to watch their share prices rise, while also collecting steady income.

Dominant Stock Market Performance

While those are sensible precepts, neglecting the FANG stocks was a costly decision. Since the term was first coined, the FANGs have crushed all opposition. They have been far better than cash. Far better than bonds. Far better than gold or energy. Far better than foreign stocks. Far better than other US equities. Among possible competitors, only cryptocurrencies have been superior.

See for yourself. The chart below shows the growth of $10,000 since March 2013 for each of the four FANG companies, along with Morningstar US Market Index.

At bottom is the market index, in light blue. It appears to have occupied a different universe! In fairness to those of us who overlooked the FANG stocks (raises hand), and who held portfolios that resembled the overall stock market (raises hand again), quadrupling one’s money in 11 years is no mean feat, even if that period featured an inflationary bout. The good news for those who did neglect FANGs is that, while they missed the fast road to riches, the slower path also sufficed.

For amusement’s sake, I also compiled a chart that depicts the performance of the four-security FANG portfolio (assuming that each stock was bought and held for the duration, as opposed to being rebalanced, although that stipulation does not greatly change the results) with those of the previously mentioned investments: 1) cash, 2) US bonds, 3) gold, 4) crude oil, 5) foreign stocks, and 6) US stocks.

Dominant Fundamentals

These returns, of course, could be interpreted as merely an extension of investors’ previous mistake. By that argument, FANG companies owe their enormous stock market success mostly to shareholder enthusiasm, rather than to their own merits. Over the years, they have progressed from being overvalued—after all, the very reason that Cramer cited those stocks in the first place was because their prices had skyrocketed—to being ridiculously and absurdly so. My illustrations do not chart operational success; instead, they chart the formation of a bubble.

A reasonable claim—but dead wrong. In fact, the business results for the FANG companies have been outstanding. For the fiscal years from 2013 through 2023, I summed the annual revenues and operating income for the four FANGs. I then rescaled those amounts, setting their starting amounts at 100. Accompanying that graphic, which appears below, is the performance of the FANG portfolio as previously computed, only this time with its initial value set at 100. (Setting aside the decimal points, the amount does not match that in the first chart because this illustration concludes two months earlier, in December 2023.)

The picture neatly tells the story. For much of the period, the return on the FANG stocks exceeded the companies’ business improvement, but the latter was nevertheless robust. Whether measured by revenues or operating income, the FANG businesses grew very rapidly. Even if its stock-price multiple had remained unchanged from its March 2013 level, the value of the FANG portfolio would have increased sevenfold from 2013 through late 2021—thereby far outstripping the performance of the overall US stock market.

The growth-stock implosion of 2022 temporarily eliminated the valuation bulge. By summer 2022, the FANG stocks traded at the same price/revenues and price/operating earnings multiples as they had nine years before. One could not ask for a purer test of the skeptics’ original thesis, that the 2013 market capitalizations of the four FANG stocks reflected fond hopes, not sober reality. Their businesses could not possibly meet investors’ collective expectations.

Yet they did. Admittedly, the FANG portfolio has once again surged ahead of the companies’ fundamentals (even more so since that presentation’s concluding date of Dec. 31, 2023). Whether that performance represents the correct conviction that these four organizations will become even more profitable than previously thought, or speculation that will soon be punished, the point remains: Nobody who bought and held the FANG stocks in 2013 has any cause for regret.

The ‘Magnificent Seven’?

History is now repeating. The same investment veterans who scoffed at FANG stocks in 2013 are now renouncing the “Magnificent Seven”: Alphabet GOOGL, Apple AAPL, Amazon.com AMZN, Meta Platforms META, Microsoft MSFT, Nvidia NVDA, and Tesla TSLA. Are they correct on this occasion? Or, as was the case 11 years ago, is their disapproval based on vague and unreliable general principles, as opposed to a thorough analysis of those securities’ prospects?

Such will be the topic for Tuesday’s column.