Why the FAANGs are soaring and can they keep flying?

In an environment which is currently difficult for UK income investors, it’s tempting to look overseas for income or growth. That’s part of the reason why FAANG stocks are increasingly popular both here and in the US, with their share prices soaring so far this year. Investors have very high expectations for the shares and for the companies that make up the FANNGs to keep growing strongly.

What are the FAANGs?

First of all for those of you unfamiliar with the term FAANGs, it’s an acronym that refers to the stocks of five prominent American technology companies: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX); and Alphabet (GOOG) (formerly known as Google).

The companies make up some of the largest listed companies globally and the shares have significant momentum – partly as a result of coronavirus. Here’s how Jim Cramer, a famous US market commentator, describes the stocks.

What’s happened to their share prices and what’s driving the performance?

In short, the FAANGs have been amongst the big winners of 2020 so far. The lockdown from covid-19 has driven up expectations for technology stocks due to more home working, more people shopping online and so forth. I think it’s this increased expectation that’s primarily driving the share price growth, although all do have plenty of potential for revenue growth as well.

Amazon share price chart YTD 2020

Figure 1 – Amazon 2020 YTD

There are of course other big winners that don’t get classified as a FAANG. Shares such as Microsoft have also prospered; in its case because of Microsoft Teams primarily which aligns neatly with the increase in remote working teams.

Microsoft share price chart YTD 2020

Figure 2 – Microsoft YTD 2020

Can the outperformance continue? 

I think it would be brave to bet against the FAANGs. Increasingly they have the backing of big international, institutional investors, they have momentum, they have a story which is positive and they are proven winners. I’d expect the outperformance to continue but I’m nervous of a bubble.

I think for a while the shares will keep rising because of the factors above and because they can keep growing revenues. These companies now also wield a huge amount of power, and often cash, and Facebook and Amazon in particular but also Apple have ancillary opportunities to grow. As long as they keep investors onside the share price should keep growing, but don’t be surprised if one day they collapse.

For income and value-focused investors it’s hard to get excited about these shares. Amazon has a P/E well above 100 for example. As the FAANGs are profitable, there is potential the dividend payout ratio could move up in the coming years. I suspect though most will keep reinvesting in growth to keep competitors at bay and to focus on the growth story that is whetting shareholders’ appetites.

How to get access to these companies from the UK?

If you do feel you want a piece of the action then of course you can invest directly in the shares through a platform like Hargreaves Lansdown. Though that potentially has tax and currency exchange implications you’ll need to be aware of.

Probably a better way to tap into the momentum behind these shares would likely be through a UK based fund or investment trust. That way at least your funds are pooled and you benefit from some level of diversification rather than having to pick individual winners.

In fact, on auditing my own investments I have exposure to these companies – perhaps more than I intended – through holdings in Artemis Global Growth, HSBC S&P 500 ETF and Baillie Gifford Global Growth Alpha.

Other options include Baillie Gifford US Growth Trust, Allianz Technology Trust and L&G Global Tech Index Trust. Note there are many other funds and trusts available as this part of the market is very well served. These are just some examples, most of which in line with the rise in tech stocks have likewise performed well so far this year.

I hope this article is useful as a starting point on investing in FAANGs. As always it’s just my opinion. If you want to discuss shares with other like-minded investors please join the Facebook group.

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