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The Future Of The FANG Trade

|Includes: Amazon.com, Inc. (AMZN), FB, GOOG, NFLX

Summary

AMZN may reverse.

NFLX's valuation may be a problem.

FB and GOOG look strong.

The FANG trade, popularized in 2015, is a group of technology stocks that have had incredible performance. FANG is an acronym for Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG). Since the beginning of 2015, GOOG is up more than 80% while FB is up around 120%. AMZN has had a great run and is close to a 200% gain, and NFLX is up 270%. However, SPY the S&P 500 tracking ETF, is only up around 30% in the same time frame. With these incredible runs, it is only natural for investors to wonder how much longer these trades can continue their out performance.

Recently, the technology sector has seen an increase in volatility. (See the XLK Average True Range Chart: XLK ATR.) The increase in volatility could be coming from the strength of the dollar and interest rates. The strengthening dollar forces US companies to be less competitive in international market, thus sales and revenues are likely to fall. Rising interest rates also play a role because the tech sector is generally full of capital consuming growth stocks. Higher capital costs mean gross profit is also likely to slip because they will need to pay more to borrow.

Now that we have looked at some of the headwinds facing the sector, let’s take a look at the four FANG stocks.

Facebook

The stock is currently at the top of its upwards price channel. It has been in this channel since 2014, and started at a price around $55 per share. As of close September 29, 2017, the current price is $170.87.

Being at the top of the channel indicates that there may be some weakness ahead, as the stock starts to move away from the top line. Additionally, there is a clear divergence in the momentum indicators, MACD and RSI, which tells us that the upwards price movement has weakened. Overall, the short-term outlook does not look too great for the stock.

However, the long-term picture still looks good. The upwards trend is still intact as the channel continues to give the stock a support. The best way to play this may be to take some profits now, but not necessarily close out the entire position. If the stock moves downwards and reaches the bottom of the channel, it could be a great time to buy the stock, and add to your position once again. Although, if the channel support is broken, the trend may have come to an end, and a full liquidation may make sense. (Click to see the charts: FB Chart.)

Amazon

AMZN does not look near as great as FB. The uptrend line has recently failed, and the stock may be in a head and shoulders pattern. A head and shoulders is a classic reversal pattern in technical analysis. The pattern is shaped like the bust of a person. There are many variations of the pattern, but the classical pattern has three peaks. The middle peak is the highest, that is the head. The two other peaks are smaller and surround the head, like shoulders. The entire pattern has a single support that is called the neckline. The pattern is confirmed once the price moves below the neckline. (See the AMZN Head and Shoulders pattern: AMZN Head and Shoulders.) The trend line failure and the possible head and shoulders pattern indicate a future down trend for the stock. (Click here to see the chart: AMZN Chart.)

Netflix

A large gap started the uptrend for NFLX at the beginning of 2013. The stock has moved from $20 all the way up to $181.35, as of close on September 29, 2017. Overall, there is not much to say about the stock. Volume has been weakening over time, as the stock has risen, but that is typical. A  Weakening volume is a sign of a weakening trend, but that will not be confirmed until the stock price falls below the green trend line. (Click here to see the chart: NFLX Chart.)

However, the value behind the company stock could be a cause for concern. With a current P/E ratio of over 220, this is an expensive stock. This means that for every $1 the company earns, investors are currently paying $220. Nonetheless, this is not as high as AMZN, which is facing a value problem as well. AMZN’s P/E ratio is over 244.

Alphabet

GOOG has had the weakest run of the FANG stocks, but that is not to say it has not been doing well. This stock recently tested the trend line, and has continued to move up that line. The diverging MACD and RSI were precursors to that trend line hold, and would have given you added confidence that the trend would hold. Also, it is nice to see that the volume levels have stayed relatively constant. This tells us that the trend is still strong. (Click here to see the chart: GOOG Chart.)

The Future of FANG

As of now, the future of FANG may be without Amazon. The stock has failed to stay above its trend line, and it may be in the midst of a reversal head and shoulders pattern. Fundamentally, I am not sure why the stock could face declines, other than it is very expensive. Amazon has already changed the way the world conducts business, but according to the technical analysis, investors may start to sell their stock. Maybe with the recent acquisition of Whole Foods, investors are worried that the company is spreading itself too thin. Or, this could be a case of people wanting to take profits. However, this is all speculation because the stock has not yet faced the decline described. If the neckline is broken though, it may be time to sell the stock.

The only problem with Netflix is that the stock is also very expensive. Although, it is not hard to see why investors have allowed the price to grow so high. The company has really started to become a force, not only in the streaming space, but it is also disrupting Hollywood and the film industry. What is very interesting is that one of Netflix’s main competitors is Amazon. Amazon creates its own video content as well as provides streaming services.

Facebook and Alphabet are the relatively cheap stocks in the FANG group, but compared to the S&P 500, they are still on the higher side. Although, these companies continue to surprise investors. It seems like every quarter they are generating more and more revenue. Alphabet has a current earnings per share (NYSEARCA:EPS) of 27.59. For comparison purposes, NFLX has an EPS of .87, AMZN has an EPS of 3.93, and FB has an EPS of 4.47.

The FANG stocks will not keep up their out performance forever. Eventually Netflix and Amazon will need to realign with their fundamental values. That will either happen by the stock falling in price, or the companies will need to generate a lot more cash flow. It is not so hard to see Amazon catch up because they control so much already, and they keep on growing into more segments of the world economy. Netflix is a little harder to see because they cannot do much more than get additional subscribers. They are moving into more regional spaces and are continuing to grow, but has the valuation gotten ahead of itself? Alphabet and Facebook may be the lasting survivors of this trade.

Visit brtechnicals.com! Thank you for reading and happy trading!

Written by Brandon Ross for BRTechnicals.com October 1, 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.