by James Tierney, Jr. CIO, Concentrated U.S. Equity & Michael Walker, PM, Research Analyst, Concentrated Growth, AllianceBernstein
For several years, the largest US technology and new media companies were widely seen a cluster of similar stocks. Not anymore. The recent divergence of the so-called FAANGs reminds us why fundamentals should always trump fads for long-term equity investors.
Itās one of the most widely known acronyms on Wall Street in recent years, even as it became clumsier to pronounce. First came the FANGsāFacebook (now Meta Platforms), Amazon, Netflix and Google. Apple later joined to create the FAANGs, and more recently, a revitalized Microsoft came aboard to the FAANMGs. The acronym reflected a popular view that these stocks were made from the same mold. And their performance was highly correlated, especially during the pandemic, when demand for digital services surged. As a result, these six stocks comprised nearly 39% of the Russell 1000 Growth Index, and 24% of the S&P 500 at the end of 2021.
Market Correction Amplifies Differences
Much has changed during this yearās correction. While all six stocks have declined, Netflix and Meta fell harder than the others. The correlation has faded, and returns have diverged (Display).
In recent years, weāve frequently warned of concentration risk in US equity markets. When the FAANGs rose in tandem, passive investors enjoyed handsome returns but also accumulated a hefty weighting in the priciest US mega-cap names. In our view, each company should be researched and held based on its merits, using a disciplined investing approach and at measured weights.
Evaluating Strengths and Weaknesses
Even after the declines, US mega-caps are still large components of US indices, so they canāt be ignored. But an active approach is essential to find those offering profitable, sustainable growth at the right price. The technology and media industries offer an array of business opportunities from cloud computing, search engines and social media to streaming, hardware and online shopping.
Since each segment faces different dynamics and regulatory pressures, business outcomes will differ. Media streaming is seeing signs of saturation while also becoming much more competitive. Social media incumbents are fending off new competitors. Unprecedented inflationary pressure is adding hurdles to e-commerce. The cloud is being elevated by the digital transformation boom. Smartphones have become an indispensable, regularly upgraded utility.
Of course, all this was true before 2022. But now the market is making the distinction that there will be winners and losers, unlike the last five years where everyone was seen as a winner. Evaluating the fundamental strengths and weaknesses of each company is the key to investing successfully in the right mega-cap growth companies for a more challenging macroeconomic and market environment.
References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AB. The specific securities identified and described do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.
About the Authors
James T. Tierney, Jr. is Chief Investment Officer of Concentrated US Growth. Prior to joining AB in December 2013, he was CIO at W.P. Stewart & Co. Tierney began his career in 1988 in equity research at J.P. Morgan Investment Management, where he analyzed entertainment, healthcare and finance companies. He left J.P. Morgan in 1990 to pursue an MBA and returned in 1992 as a senior analyst covering energy, transportation, media and entertainment. Tierney joined W.P. Stewart in 2000. He holds a BS in finance from Providence College and an MBA from Columbia Business School at Columbia University. Location: New York
Michael Walker is a Portfolio Manager/Senior Research Analyst for Concentrated Growth. Prior to joining AB in December 2013, he was a portfolio manager/analyst on the US equity research and portfolio-management team at WPS Advisors. Prior to that, Walker was the technology sector analyst for the large-cap growth fund at Ark Asset Management. He had previously spent nine years as a senior research analyst covering the IT hardware and electronics supply chain sectors, first at Donaldson, Lufkin and Jenrette and then at Credit Suisse First Boston. In 2006, Walker was ranked the top analyst in his sector in the Institutional Investor All-America Research Team survey, after having ranked third in 2004 and 2005. He began his career as an IT consultant with Deloitte Consulting. Walker holds a BS in economics (magna cum laude) from the Wharton School at the University of Pennsylvania. Location: New York
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