What Have You Done For Me Lately? FAANGS Gone Value

This week’s post was inspired from an excellent column by Wes Crill, Head of Investment Strategies for Dimensional Fund Advisors (DFA). Many of you are familiar with DFA since we use DFA Funds in some of our portfolios. DFA is an industry leader  that uses academic research in their equity and fixed income products. Their aim is to use rigorous scientific and mathematical methodologies to target higher expected returns without the need to time the market.

If you follow the world of investing and financial markets, you may have heard the pundits and market gurus tout FAANG stocks. 

What are FAANG stocks? Faang stocks are a group of technology companies—Facebook, Amazon, Apple, Netflix and Google (or Alphabet). These companies are all leaders in the tech industry and have been since the beginning of their existence.They're all American-based companies, but they have large international presences as well. They've become such huge corporations that they've become synonymous with the tech industry itself.

It is interesting to look back and see what the forecasters were predicting and talking about in 2021. As we all are completely aware, 2021 was a difficult year. The economy was still reeling from lockdowns and the Coronavirus. Though the total US market ended on a positive note, there was still uncertainty for lots of investors as the threat of inflation loomed for investors. However, as expected, the headlines of hype never stop regarding what stocks to pick or what companies to invest in. 

As we have stated numerous times, investors would be well served not to listen to the noise and hype of Wall Street prognosticators who promote the idea that if you have enough information and smarts, you can beat the market. (See our previous post regarding how the media confuses investors here). 

In September 2021, The Motley Fool published this headline:

The article promotes FAANG stocks because they “have run circles around the broader market.” The reasoning behind this? According to the writer, the FAANG stocks are superior in performance because “[...] these companies have outperformed the market by such a wide margin, it likely has to do with their innovation, competitive advantages, and leading market share in their respective industries.”

The one particular FAANG stock getting the hype in this article is Facebook (META). According to the pundit, Facebook (META) is not “anywhere close to having reached its full potential.” In fact, the writer claims that Facebook (META) will not “see significant slowing anytime soon.” (You can read the article here).

Another FAANG stock that was the darling of many experts in 2021 was Netflix. 

Stock analysts predicted that Netflix would have “upside” due to the company’s ability to “avoid the potential supply chain disruptions far better than the rest.” 

We are not “picking on” these two particular FAANG stocks nor are we “picking on” stock pickers and analysts. What we are hoping to point out is that following advice like this is not a prudent investment strategy. In fact, the danger is that if you listen to these pundits, it will cause you to lose focus on your financial plan and road map–the anxiety and worry is not worth it. A prudent financial plan and investment strategy has already contemplated all sorts of market scenarios to ensure you have the highest probability of meeting your goals and dreams. 

 Enjoy the article by Wes Crill from DFA. It is definitely worth reading. 

What Have You Done For Me Lately - FAANGs Gone Value

One of the more vocal arguments against value investing stems from a belief that we’re in a “new normal” environment where innovative or high-tech companies have a leg up on “old guard” industries, such as energy or financials. FAANG stocks have typically been the poster children for this position; these behemoth technology companies have contributed meaningfully to the market’s overall return and, by virtue of being growth stocks, the negative value premiums in recent years. Well, guess who showed up as value this summer! That’s right, Russell reclassified Meta (formerly Facebook, the “F” in FAANG) and Netflix (the “N”) from growth to value during the index provider’s annual reconstitution event. Although signs have been pointing to the waning dominance of FAANG stocks since the start of 2022, it is somewhat ironic that 40% of the pillars supporting an aversion to value investing have now become value stocks themselves.

This also serves to highlight a possible misconception about the spirit of value investing. A value premium is a discount-rate effect: If expected future cash flows are not identically discounted for all stocks, then the ones with low prices relative to their expected future cash flows have higher expected returns. Investors advocating for the superiority of growth firms, such as the FAANGs, are inadvertently making the case for their expected future cash flows to be discounted at a lower level—all else equal, greater certainty around future success should be associated with a lower expected return. In fact, as Exhibit 1 shows, this is generally what we see for stocks of companies once they grow to become among the largest in the market. In other words, investors should be careful about equating expected company success with expected stock returns.