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Felix Wintle
Fund Manager
The problem with Wall Street acronyms is that they neatly bracket stocks or markets into one seemingly homogenous group when in reality the component parts are anything but. For those of us that remember the BRIC acronym from the middle of last decade will recall that Brazil, Russia, India and China had very little in common apart from being fast-growing emerging markets, but importantly they had different drivers and different risk factors, which the acronym umbrella sought to obscure. In creating the acronym, Wall Street invented a mini asset class that could then be marketed and sold.
It usually pays to be wary of acronyms. It’s a bit like stocks that become verbs. Sounds great in theory, but when you think about it, it signals that a stock is nearer the end of its growth trajectory than the beginning. The trick is to be long before they become household names, not after. See the Zoom Video share price for details. And this is part of the problem with FAANG today; which investor has not got exposure to these stocks in some form or other? If not directly, then certainly via active or passive equity funds.
In disaggregating the FAANGs we uncover five very different businesses. Netflix and Facebook, clearly under a great deal of stress already. The former is ex-growth, having guided to adding 2.5m new subs last quarter, then delivered -200,000, is going through a repricing process from tech company to media company, and it’s hard to see how this stock can recover any of its former lustre. Facebook too, now Meta Platforms, also disappointed investors last quarter with a significantly weaker guide. The re-naming of the company was a red flag. What does it tell you of management’s regard for their brand when it changes its iconic, eponymous brand name to something ephemeral and meaningless? That’s what tobacco companies do.
As for others in this group, Apple has held up the best and is the only FAANG stock to have delivered positive relative performance against the S&P 500 in the year-to-date period. And to be fair it has been and continues to be one of the best businesses of all time. Google, now Alphabet, is also a great business but as with Apple is vulnerable to P/E contraction as the market pays less for growth. This has also been seen with Amazon, another world class business, but a stock that has gone sideways for two years. And this is really the point, these three remain great companies but they are unlikely to remain great stocks, in my opinion.
Two other factors to consider:
- Regulation: These businesses are all in the cross hairs of the regulator primarily for anti-competitive behaviour, yet none of them started out as such. In fact, the opposite. They created new markets or products and, in Amazon’s case, democratised the ecommerce space. They have grown so dominant in their fields that now they seem anti-competitive, or just too powerful. That is not the starting point of great runs of outperformance, it’s much more likely to be a sign of the end. And these stocks have already been great outperformers for the last decade.
- The chart below shows the 10 biggest companies by market cap at the end of each decade. Each list perfectly describes the decade just ended, not the decade to come. Energy in the 70s, Japan the 80s etc. What’s interesting is that after their decade in the sun, many of these biggest and best became pariah stocks in subsequent years.
It seems hard to believe it, but it’s already happened to Netflix and Facebook, and other former darlings like PayPal. Whilst the mega caps will most likely make this list of ten biggest companies at the end of this decade, history suggests they are unlikely to have been the best investments.
WARNING: All information about the VT Tyndall North American Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not