Options Arena: FAANG Stocks — Bargain or Ticking Time Bomb?
The FAANG stocks — that’s Facebook, Apple, Amazon, Netflix, and Google — were the pride and joy of investors’ portfolios this past decade.Here’s a snapshot of how each has performed since 2012, compared to the S&P 500.
Even the worst among them, Google, outperformed SPY by more than 50%.And Netflix… I mean, sheesh. Even today, it’s up 1,634%. But we’re in a new era now. Stocks are firmly in a bear market, and the once stalwart FAANGS are showing cracks in their armor. All of them are well off their highs, and helping unwind the portfolios they helped grow. Still, it’s hard to imagine these stocks going to zero anytime soon. And it got me thinking — which of these names is the best buy to weather the financial hurricane we find ourselves in… And which of them will make you look back five years from now and go, “Damn, was that a bargain!”? So for Options Arena this week, our Options Masters will pick the FAANG stock they think will perform the best over the next year… And pick one (not necessarily the same one) they think will perform the best over the next five years. Their analyses, as always, are thought-provoking and on-point. And if you’ve followed along, you know by now that some of our Masters don’t always like to play by the rules… So if you hold these names in your portfolio, pay close attention to this week’s Arena. Depending on who you agree with, you could come out with a sense of relief… or a bead of sweat rolling down your brow…
Amber: Amazon Should Lose the Least
Value has nothing to do with the short term. But in the long run, it affects stock prices.And since the question is which FAANG should do best in the long run, we need to look at value. My go-to value tool is the PEG ratio. This tool compares the price-to-earnings (P/E) ratio to the earnings per share (EPS) growth rate. A PEG ratio of 1 is considered to be fair value. That means the P/E ratio equals the EPS growth rate. This formula recognizes that rapid growth in EPS should be rewarded with higher P/E ratios. This is more useful than the traditional approach to PE ratios, which says a stock is undervalued if the ratio is less than 12 or some other arbitrary value. PEG ratios allow us to generate price targets by multiplying the EPS and the growth rate. In the table below, I look at each of the FAANGs. Only Amazon offers value. Alphabet, parent of Google, is trading near its fair value. Apple is the most overvalued.
Based on this analysis, I like AMZN for the long term.For the short run, I’m not sure any of these will be “winners.” After all, we are in a bear market. But AMZN is likely to lose the least. AAPL, on the other hand, is likely to lose the most. So if I had to buy a call, I’d choose AMZN. But I’d hedge that with a put on AAPL.
Chad: Netflix for Now, Amazon for Later
I’m going to say Netflix (NFLX) will be the top performer over the next 12 months. It’s already down 75%, way more than any other FAANG.But more importantly, it’s deepest into the lagging quadrant on my monthly Profit Radar below. This shows it has a lot of volatility — perfect for a big move. It’s also probably the closest stock to a bottom. I don’t see it falling much more from here… And when it bottoms, it will likely see a sharper bounce than the rest of them. Now, all the other FAANG stocks are either in or heading toward the lagging quadrant as well. But for the next five years, I’ll jump on Amazon (AMZN). The stock has dropped 50% so far, but is still above its pandemic lows. Out of all these companies, I think Amazon has benefited the most over the last two years, thanks to a shift in consumer shopping and spending habits. That will give them the biggest and most steady run out of the FAANG stocks in the next five years.
Mike: Stocks Can Always Fall Further — Even FAANGS
FAANGs led the bull market. But even though they are down significantly, there’s always more downside risk.I remember an old trader I knew who liked to start phone calls with questions. He’d call and instead of saying “hello,” he’d say something like: “Do you know how a stock loses 90% of its value?” The answer is important to remember — it falls 80%, and then drops another 50%. Now, I read this week’s question as “What’s the best way to profit from FAANG stocks by buying something?” The answer isn’t to buy Netflix because it’s down about 80%. I think the answer is to buy the Arrow Reverse Cap 500 ETF (YPS). FAANGs account for more than 16% of the S&P 500. If we’re in a bear market, which seems likely, we should expect the selling in these stocks to continue. But institutional investors who sell them can’t always hold cash. They’re commonly required to invest at least 98% of their assets in stocks. They need to buy something, and I think they will buy the smaller components of the S&P 500. Many of these stocks have been ignored in the bull market and some are undervalued. One way to gain exposure to them is through YPS. The ETF’s biggest holding is Perrigo Co PLC (PRGO), the stock with the least weight in the S&P 500. The smallest holding in YPS is Apple (AAPL), the largest component in the S&P 500. YPS minimizes the pain of further losses in FAANGs. It also benefits from a move into the undervalued stocks in the index. It’s a safe way to benefit from the likely weakness of FAANG. I should note YPS is a small ETF with less than $18 million in assets. This is about 0.005% of the size of SPDR S&P 500 ETF. Many traders avoid small ETFs, but YPS is suitable for trading. The liquidity of an ETF depends on its portfolio rather than its size. That means the spread in YPS is small. Tracking error, or the standard deviation between the portfolio and the benchmark, helps quantify management effectiveness and costs. YPS is better than average on this metric. The fund sponsor also has a long track record, which means they are capable of maintaining the fund with a small asset base. Portfolio liquidity, tracking error, and sponsorship are the real factors that determine if a fund is tradable and YPS passes the test.
Chris: This Company Will Lead the VR Movement
There’s one clear answer.Apple and Google are down about 30%. So is the overall Nasdaq. As we’ve known for a long time, these stocks are a proxy for the index. So if you think the Nasdaq has further to fall, don’t bet on these. Amazon is down 45%. And frankly, it doesn’t look oversold yet. It’s retesting its near-term bottom and will probably head lower. My guess is it ultimately retests its December 2018 lows.
Facebook is down over 50%. The company showed its cards when it renamed itself Meta, letting the world know their existing business structure wouldn’t carry them into the future. But they ARE innovating, which is a positive sign.Netflix is dead in the water, down 75%. I watch a lot of Netflix. Their programming sucks. And they just fired their last bullet with the final season of Stranger Things. It’s a huge hit, but their biggest show is now over. They’re scraping the bottom of the barrel. And their grand plans to innovate include trying to compete with companies like Nintendo, Sony, and Microsoft in the video game space. Good luck. It’s tempting to buy a stock that was once such a big name when it’s down 75%, but there’s a reason it’s down 75%.
So, over the next year, the clear answer to me is Apple. It’s a dominant brand, and with the possibility of new Apple Glasses, an AR/VR headset (which looks freaking cool), it’s clear to me they’re going to remain a dominant company. They have a great track record of taking other companies’ innovations and making them cooler, sexier, and sleeker.But over five years, I like Facebook. They were first in line on the virtual reality movement, and that head start is giving them an advantage in the metaverse field. The metaverse will likely be the future of social media. It’s where people will go to actually hang out online, not just text or video message each other from respective devices. This trend WILL take time to play out, but five years is a comfortable horizon. This is one stock you’ll want to start buying in the second half of 2022, as well as 2023. Options for the stock exist out through June 2024. However, they are expensive, so I would wait for some more selling to commence before deploying any capital on a leveraged trade.
Well, maybe five years from now we can revisit this debate in the metaverse…Click here and vote for this week’s Arena Champion. Last week, 50% of you were on Team Mike Carr. For the first time ever, he was crowned the solo winner of our Options Arena series for his small-cap ETF pick. (If you missed last week’s Arena, catch up here.)Until then, though, you know what to do!
Will Mike take home the prize again? Only you can decide…
Until next time,Mike Merson Managing Editor, True Options Masters