Morning Report / Are the FANG stocks agreeing with our short-term bullish view?

By Market Matters 13 April 18

Are the FANG stocks agreeing with our short-term bullish view?

Market Matters Morning Report 13th April 2018.

The ASX200 slipped -0.23% yesterday but looks poised to regain these losses early this morning courtesy of the Dow’s +293-point overnight rally although the futures market is unfortunately suggesting not a great deal more – BHP closed up +0.5% in the US but a -1.7% fall in gold and copper respectively looks likely to weigh on our broader resources today.

The story remains the same for the Australian market, to show some backbone the influential Banking Sector needs to regain some believers i.e. its down 5% for the month, almost double the weakness of the overall local market. So much for seasonal strength!

However, the global banking index has actually corrected -12.2% since its February high which is surprisingly more than our local banks, even with the local pressures of the Royal Banking Commission – note global banks have been rallying strongly since mid-2016.

What’s caught our eye this morning is the global banks are looking very bullish technically from a risk / reward perspective assuming they can hold recent lows – A net bullish sign for stocks.

Global Banking Index Chart

This morning, following the solid gains by global stocks, the ASX200 is set to open right in the middle of the psychological 5800 and 5850 levels – up around 40-points / 0.8% for the week.

We still need a close back above 5900 before we can see a real possibility of a test of 2018 highs, while a failure to hold the 5800-support area will concern us.

ASX200 Chart

Today we are again going to turn our attention the FANG stocks which we last looked at in the middle of the February share market plunge as we turned to these new market leaders for a gauge to the health of stock markets moving forward.

Back in January / February we had been making some pretty aggressive calls e.g. Amazon was set to fall over 10%.

Hence as this was unfolding, albeit in a more aggressive manner than we expected, we saw no reason not to step in and buy stocks – “volatility stops” created the hysteria in February so by understanding why stocks were down closer to 15% (as opposed to the 10%) we had expected we bought the panic. Today the tech-based NASDAQ is tricky although it is resembling the 2015-6 correction on an accelerated level, just before we saw the index break out to the upside.

US NASDAQ

Investors should consider the following very sobering statistics when evaluating the current risk / reward from the FANG’s, especially following the Facebook / Cambridge Analytica privacy debacle which has shown clear “chinks in the armour” of Mark Zuckerberg’s social media goliath.

·         The S&P500 is up over 300% since the start of this bull market in March 2009, while Amazon is up around 2000% and Netflix a remarkable +5000%.

·         The valuations on some of these FANG’s are simply scary with Netflix Est P/E for 2018 at 112x and Amazon 172x compared to say A2 Milk on 43x estimated 2018 earnings.

We now even have a FANG + index which also includes the likes of Tesla which enables investors to buy a basket of these relatively new technology stocks but as we saw in February with “volatility positions” a potentially very dangerous scenario when people all want to get off the train at the same time – remember we are not fans of Tesla.

NYSE FANG+ Index Chart

Similar to February let’s look at the 5 NASDAQ driving FANG stocks on an individual level especially as the overall index is a touch hard to pick at present.

1 Facebook $US163.87

Facebooks had a tough time recently as the market digests its extra risks / costs of privacy issues. However, the stock is still trading within 16% of its all-time high and will look good technically if it can close ~4% higher.

Facebook is (only) trading on a valuation of 23x which is cheap compared to many of its piers. While we find it hard to image significant growth moving forward the stock is not screamingly expensive.

We are bearish Facebook closer to the $US200 area as opposed to today, at least for now.

Facebook Chart

2 APPLE $US174.14

The sensible one amongst the group only trading on a valuation of 15.3x as the market clearly sees constrained growth for the IT giant.

Technically we would be sellers closer to the $US200 level.

APPLE (US) Chart

 

3 Amazon.com $US1448.50

The on-line retail giant is sitting just over 10% below its March’s all-time high. We find the current high valuation scary and if anything were to go a miss we could very quickly see a painful rerating of the stock.

We are neutral at current levels but would be technical sellers into fresh 2018 highs.

Amazon.com Chart

4 Netflix $US309.25

Amazingly Netflix, even as the company trades on a huge valuation, looks very strong technically.

We can see Netflix trading between $US250 and $US350 over the next year hence we are neutral / slightly bullish just here.

Netflix (FFLX) Chart

5 Google US $US1037.29

Another relatively sensible one in the group from a valuation perspective trading on 25x forward. It’s certainly not a business model we would argue with and we would not be surprised to see fresh all-time highs moving forward in 2018.

We can see Google trading between $US1000 and $US1200 over the next year hence we are neutral / slightly bullish just here.

Google Inc – Class A Chart

Conclusion (s)

1.       The FANG’s are unfortunately not giving us any major insight into stock markets at present.

2.       We are currently neutral / bullish the FANG’s short-term.

3.       Medium-term we can see some big issues on the horizon for stocks like Amazon and Netflix who are priced for perfection and then some– plus of course Tesla which still losses more $$ than I can comprehend!

Overnight Market Matters Wrap

·    Geopolitical tensions eased overnight, as the US major indices rallied following comments from US President Trump considering to join back to the Tran-Pacific Partnership trade deal that he withdrew from along with corporate earnings season kicking off.

·    The financials were the winners of the broader US market following Blackrock’s first quarter earnings beating analysts’ consensus, with further financials to report tonight.  Macquarie Group (MQG) is expected to benefit from this and outperform the broader local market today.

·    Gold declined as tensions eased, with gold futures off 1.61% this morning.

·    The June SPI Futures is indicating the ASX 200 to open 16 points higher, back above the 5830 level this morning.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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