While a handful of mega-cap technology stocks have dominated the news this year, potentially better opportunities are being missed among software stocks.
The abbreviation for the news-dominating stocks, FAANG, represents Facebook, Apple, Amazon, Netflix, and Google.
Another group of large-cap stocks in the software space appears more attractive from both a technical and a fundamental perspective.
Ask anyone what "FAANG" meant in 2015 and 2016, and you probably would have received a shrug of the shoulders quickly followed by an "I have no clue." In 2017, however, FAANG is a household term referring to the five stocks which have helped lead the Nasdaq Composite to new highs over the past year. The stocks within the FAANG group include Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google (NASDAQ:GOOGL), and investors and traders alike have viewed these mega-cap technology stocks as offering some of the best opportunities for significant gains. These FAANG investors, however, may be missing out on another group of stocks which could offer much better opportunities on both shorter- and longer-term time horizons.
These stocks are the large, but not mega-cap, software stocks which certainly have helped the performance the Nasdaq Composite over the past several months, but not to the extent that the FAANG stocks have due to their market-cap weighting. These stocks are Salesforce.com (NYSE:CRM), Activision Blizzard (NASDAQ:ATVI), Adobe (NASDAQ:ADBE), Electronic Arts (NASDAQ:EA), and Oracle (NYSE:ORCL). While not as catchy a name as FAANG, these stocks are given the abbreviation "SAAEO," or "CAAEO" if you prefer to use the tickers for your acronym. Nevertheless, SAAEO looks much more attractive than FAANG from both a technical and fundamental perspective.
Fama, French, Carhart, and Andrew Lo (all academics) taught us long ago that relative strength works. What tends to go up tends to keep going up, and what outperforms tends to keep outperforming for an extended period of time. With this in mind, the group of software stocks, SAAEO, appears much better positioned to lead in the future than the more internet-related FAANG stocks. See below.
The leadership of SAAEO versus FAANG on a relative strength basis is echoed on longer time frames, such as six months and one year. This means an investor would have underperformed the SAAEO portfolio if they had invested in FAANG stocks instead. The good news is, as mentioned before, relative strength is sticky, meaning that SAAEO should continue to outperform FAANG going forward.
Comparing SAAEO to FAANG, the former group of stocks appears to be more fundamentally attractive by a variety of measures. The only relative valuation metric in which SAAEO falls behind FAANG is on average price/sales multiple, and the margin by which it falls behind is very slim. All of the other valuation metrics used - Forward P/E, PEG Ratio, Price/Book - give the SAAEO group of stocks much more attractive valuations versus FAANG despite better stock price performances over the last year.
Finally, using the current ratio as a quick solvency check, FAANG comes out ahead of SAEOO. This should come as no surprise, however, as we have been aware for years of Facebook, Apple, and Google's massive cash reserves. Either way, both the SAAEO and FAANG group of stocks look like they shouldn't be running into solvency issues in the near future. See below for the analysis. I have highlighted the various ratios which looked most favorable for those who want to know which stocks had the greatest impact on the analysis. Also, the color-coded formatting could help those looking to stock pick from SAAEO or FAANG. For instance, within the SAAEO group, ATVI, EA, and ORCL look the most fundamentally attractive. Within FAANG, GOOGL and AAPL appear the strongest.
Bottom Line: Consider SAAEO Stocks
The analysis above concludes that SAAEO stocks are more attractive when compared to FAANG stocks on both a technical and a fundamental basis. Whether the SAAEO acronym will catch on and become a household term remains to be seen, but given that these opportunities remain relatively uncovered by media outlets, SAAEO most likely still has great potential. Finally, for those who prefer the diversification of ETFs but still want exposure to SAAEO, the iShares North American Tech-Software ETF (BATS:IGV) should give you the exposure you desire.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.