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Client Question: What do you think about the FAANG stocks?

This year, the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have enjoyed an average 47% return, well above the market averages. The reason we don’t own them is three-fold:

  1. They make up a large portion of the Dow Jones Industrial Index and the S&P 500 Index, meaning every ETF owns them. What you usually end up with is a reversion to the mean. The more shares that must be bought with each investor purchase of an index fund, the more the performance tends to follow an “average” return.
  2. Stocks like that usually signal their price peak before a precipitous fall. Just ask shareholders of Nortel, Royal Bank and Valeant. They once were the largest holding on the TSX Index but soon fell in value after the peak.
  3. We prefer to own stocks that aren’t widely held by investors. This gives us a chance to get in early. We can enjoy gains based on the company’s own performance and when they are added to an index or grow enough to attract more eyeballs to the stock, the returns can continue to rise at a greater rate for a longer time. In our US stock portfolios are 5 names that have outperformed the FAANG stocks this year:
FAANG Stocks 2017 Performance (YTD at 12/01/17) US Liberty Stocks 2017 Performance (YTD at 12/01/17)
Facebook 52% Cognex 115%
Amazon 55% Graco 55%
Apple 47% Globus Medical 49%
Netflix 51% Raven 47%
Google 29% Atrion 33%
Average Return 47% Average Return 60%
Data courtesy of Bloomberg LLP