Are FANMAG stocks in a bubble?

Don’t start partying like it’s 1999 – keep watching valuations, these analysts argue

Fan magazines – for the best-loved group of stocks


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Much has been written about how financial markets are increasingly becoming bifurcated into “haves and have-nots.”

One of the clearest representations of that phenomenon may be in the mega-cap technology stocks known as “FANMAG.”

The FANMAG acronym expands on the well-known “FANG” stocks that dominated much of the 2010s: Facebook Inc.
FB,
+1.96%
,
Amazon.com Inc.
AMZN,
+0.87%
,
Netflix Inc.
NFLX,
+2.77%
,
and Google
GOOG,
+1.25%
.
Later, Apple Inc.
AAPL,
-0.59%

and then Microsoft Corp.
MSFT,
+1.45%

were added.

As investors pile in, rewarding the already proven — and pricy — winners, some analysts are suggesting it may soon be time to keep an eye out for bubbles.

See:These 2 stocks dominated S&P 500 returns in 2019 — and the decade

“Clearly FANMAG deserves to trade at a premium,” strategists at Ned Davis Research said in an analysis out Thursday. But, they added, “we remain on bubble watch because we know a premium can become excessive in a bifurcated fundamental environment like we have now.”

First, to the premium: by one measure, sales didn’t just grow for the FANMAG components in the first quarter of the year, it accelerated. And the companies remain quite profitable: “Other sectors have to be envious of FANMAG’s 56.2% gross margins and 17.8% net margins,” wrote the analysts, Pat Tschosik and Rob Anderson.

Net sales

Gross Profit

Net income

FANMAG

$964.4

$541.7

$171.8

% of S&P 500 500

7.7

12.1

16.1

Year over year growth

14.9%

16.2%

12.3%

Margin

56.2%

17.8%

S&P 500 ex-FANMAG

$11,548.5

$3,951.5

$896.9

Year over year growth

3.1%

0.3%

-15.0%

Margin

34.2%

7.8%

Figures are for calendar year Q1, trailing four quarters. Source: Ned Davis Research

Tschosik and Anderson reckon that FANMAG stocks are more richly valued: they trade at 19.8 times enterprise value to earnings before interest, tax, depreciation and amortization, versus 11.0 times that metric for the rest of the S&P 500
SPX,
+0.39%

. But their gross margins are 1.6 times and net margins 2.3 times the rest of the index.

“As a COVID ‘winner’ with fundamentals trending in the opposite direction of most other sectors, we would not sell the group,” the analysts wrote. “Eventually, however, other sectors’ fundamentals will improve and FANMAG will mean revert relative to the S&P 500. The group now accounts for 16% of S&P 500 net income, but its market cap is now heading north of 22% of S&P 500 market cap, which has us on a ‘1999-like’ bubble watch.”

FANMAG vs. Historic Bubble Composite chart, source Ned Davis Research

One other metric the Ned Davis analysts are watching is the trailing three-year gain per annum for the FANMAG cohort, shown in the chart above. Right now that’s 31.9%, which is hefty, but still below their analysis of historical bubble periods, when it reached 47.9%.

Related:ETF survival of the fittest shows just what’s going on in financial markets

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