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Will the FANG Bite?

January 25, 2016

There are some eerie similarities between today and the 2000 “dot com” bear market.

In the period leading up to the late 2000-02, the market was led by four large tech stocks – Microsoft, Dell, Cisco and Intel. As groups of alike stocks tend to do, they took on a nickname from investment analysts – The Four Horsemen. This group surged in value in 1999-2000, even though much of the market was under-performing.

 

Today, a group of four large tech stocks – Facebook, Amazon, Netflix and Google – are leading the way in an otherwise so-so market. Their nickname is FANG.

 

The chart below illustrates the point. While the S&P sputtered in 2015, the FANG stocks boomed. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One of the reasons for concern is that all the FANG stocks are trading at 30x or higher multiples of their earnings. Collectively, the prices of these stocks went up more than 60 percent in 2015, even though their collective earnings were up around 13 percent.

 

Still, FANG stocks continue to climb higher while much of the market struggles. Investors and traders continue to buy them, despite the earnings. They’re taking on more risk, hoping momentum will keep carrying prices, and making it seem like FANG stocks are the only thing keeping the market afloat.

 

But here’s the thing, they all have risks. They could all be sold off, which could lead to a bear market and its resulting fangs.

 

In reality, we could already be there and not know it yet.

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