FANG Stocks Doing Well In Spite Of Lower Economic Growth Projections

by: John M. Mason

The FANG stocks plus Apple and Microsoft in 2019 have recouped just about all of the market value they lost in the fourth quarter of 2018.

The major reason for this is the change in investor perceptions of economic growth going forward, something these high-tech stocks will not be hurt by as much as others.

Sales growth and profit margins will remain relatively high providing justification for money managers to continue to allocate more funds into this area of the market.

Six technology companies have gained $916.2 billion in market value so far this year.

This same group lost $945 billion in the fourth quarter of 2018.

This increase in value is a major reason that the S&P 500 stock index is up 16 percent this year.

The six technology companies included in this list are the FANGs - Facebook Inc. (FB), Amazon .com Inc. (AMZN), Netflix Inc. (NFLX), and Google parent Alphabet Inc. (NASDAQ:GOOG) (GOOGL) - plus Apple Inc. (AAPL) and Microsoft Corp. (MSFT).

What has changed from the fourth quarter of 2018 to now?

I believe that there has been a change in expectations about economic growth in the United States and that this has impacted the decisions of many money managers.

Last fall, the United States economy was moving along at a reasonable pace, even though prospects for growth elsewhere in the world were souring.

The Federal Reserve System held onto this belief that the US economy would continue to grow at a modest pace for 2.3 percent, about where it had been growing, on average, for the full duration of the current economic recovery.

As a consequence, Federal Reserve officials were still signaling the financial markets that they expected to raise the Fed’s policy rate of interest three times in 2019

Things changed.

Moving into the new year, Jerome Powell, Fed Chair, and his team began to back off from this view of the future. For 2019, Fed officials dropped the expected growth rate down to 2.1 percent and also backed off from the earlier “forward guidance” concerning any increases in the policy rate.

As a consequence, as mentioned above, markets began to reflect the new, lower growth projections in their decision-making. This was especially reflected in the bond market.

And, how did this impact the investments in the FANG group and others?

Well, Michael Wursthorn, writes in the Wall Street Journal that “the growth of many of those companies will continue to outpace the broader market.” Furthermore, given that these shares are already carrying “attractive valuations” they seem to be a good investment relative to other companies that will not continue to grow in the expected slower growth environment.

For example, Mr. Wursthorn writes, “Facebook Alphabet and Amazon are all projected to increase their sales in 2019 by 20 percent or more compared with just 3 percent for all of the S&P 500 companies, according to Goldman Sachs Global Investment Research.”

Mr. Wursthorm goes further by arguing that “Profit margins among those companies also remain relatively fat at a time when many firms are coping with higher labor costs due to a robust jobs market and rising material costs.”

“Facebook’s net profit margin for 2019 is expected to come in at 34%, down from 40% a year earlier. But that is higher than the 11% projected across the S&P 500, Goldman added. Alphabet’s is estimated to inch higher to 23% from 22% last year, while Amazon is expected to expand to 8% from 5%.”

One should note that these results are characteristic of these high-tech companies, something that I have written about quite frequently.

Remember that these “new” Modern Corporations are built around intellectual capital and can increase their output at a zero or near-zero marginal cost. Profit margins are usually quite high.

Furthermore, the marketing of these companies does not rely on a linear model, just a link between buyer and seller. These “new” Modern Corporations offer platforms that contain many interactions creating networks of users generating an almost continuous demand to products and services contained within the “web.”

Thus, the sales of these “new” Modern Corporations are not subject to business cycles or fluctuations in economic growth the way more traditional firms are.

So, the FANGs and other similar companies can expect growth exceeding S&P 500 companies and they can also expect to maintain higher profit margins.

Of course, this is something that investors will want to confirm.

The confirmation exercises can begin this week as Facebook, Amazon and other present their first quarter results

So, the market movements this year in tech stocks do not really seem to signify anything as far as operating performances are concerned. These stocks seem to have benefitted from a shift in investor expectations about future economic growth and potential Federal Reserve behavior.

Given the new expectations about the economy and the Fed, the key assumption is that these “new” Modern Corporations will outperform the market in general. And, given the fact that there seems to be plenty of market liquidity around, there is certainly enough ammunition around to keep the FANGs and others continuing their 2019 performance.

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.