Time To Put These FAANGs In Your Portfolio

When Stocks Are This Cheap Buy The Best Of The Best

I am not one who likes to recommend the stocks the market loves, I like looking for those undervalued, underloved, and under-owned names that can deliver truly explosive returns. Besides, names like Facebook (FB), Amazon (AMZN), and Apple (AAPL), and other high-profile stocks are probably already in most portfolios. In today’s world of passive investing, it’s not hard to own these names multiple times so you need to be careful with what you buy.

However, at a time like this, when stocks are trading at their deepest discounts in a decade, it pays to target those best-of-the-best names everybody is going to want when the scare is over.

The FAANG names, in particular, drove a large portion of market gains in 2019 and so of interest to me today. Three of the five FAANG stocks made it into the top-five list of stocks making the biggest contribution to the S&P 500’s increase in 2019. These stocks all had total returns in excess of 28% (FB and APPL both in excess of 57%) and accounted for more than 15% of the S&P 500’s increase for the year. 

Taken together, FAANG drove nearly 500 basis points of index gain or 18% of all 2019’s increase.  Within the FAANG group, Apple and Amazon stand out as ones I want to own. These stocks are supported by secular trends and poised to deliver solid revenue and EPS growth over the next two years.

Apple: The Growth Outlook Is Still There

Apple was one of the first to warn about the coronavirus impact to revenue. It's decision to close it's stores in China was one of the catalysts that sparked the broad market selloff we are experiencing even now. The news it would close all stores outside of China is a reminder the viral threat isn't over. Even so, analysts are not expecting revenue to fall this year, far from it.

The consensus estimate for fiscal Q2 revenue and EPS growth is positive if declining. Revenue should grow about 2% from the previous year with EPS up as much as 9% for the quarter and this is after the company warned it's revenue would take a hit.  Although the consensus price target for the stock has fallen a bit in the last 30 days the decline is minimal, about 0.6%, and that is offset by a rise in bullish conviction. All analysts rate Apple at least a hold and most are indicating a buy at today's levels. The consensus target is $310 or 22% upside from today's levels.

Looking to the end of the year, Apple is expected to fully recover from the virus and that's why the analysts are still bullish. Full-year 2020 growth is expected in the range of up 6% with that accelerating to over 10% in 2021, plenty of reason to want to own this stock.

With accelerating growth in the outlook, and the stock trading at only 18.6X forward earnings, double-digit capital gains are also in the forecast. Once the viral threat is passed investors will come flocking back to this blue-chip consumer tech stock. Until then, Apple pays a very safe 1.25% yield that is backed up by one of Wall Street’s largest cash hoards. If any company is positioned to withstand a catastrophe it is Apple.

Amazon, It’s Growing Now And Don’t Doubt It

While Apple is well-positioned to weather the storm and come out strong on the other side, Amazon is well-positioned for the crisis to enhance its already excellent growth story. Yes, retail is taking a hit but only consumer discretionary items. Consumers are shying away from needless purchases in favor of staple items necessary for a long stay at home. Who is best at delivering those items right to your door? Amazon is, of course.

Amazon announced today it was hiring 100,000 new employees and raising wages to help meet the virus-driven demand. Demand is so high for staple items, in fact, Amazon is curbing non-essential shipments until April 5th so it can focus on health and staple items. The VP of Operations Dave Clark says the company is seeing unprecedented demand for this time of year and this is something I think we should expect to see continue for the duration.

The estimates for Q1 have been getting a lot of revision lately, some up and some down, but the general consensus is bullish. Most analysts see a positive impact from the virus in the 1st quarter and none are recommending a sell. In terms of earnings, Q1 revenue is expected to rise by 20% but this is low. I expect to see this figure rise in the coming weeks. The Company is also expecting to see revenue grow 20% for the year, I think this estimate is low too.

Amazon doesn’t make all of its money from retail, just move of it. Amazon Web Services is a fast-growing segment in a business with a double-digit CAGR and one of the leading cloud-services providers on the planet. This helps set the company up for outperformance in 2020 and 2021.

The weekly chart of Amazon’s price action is encouraging. Price action entered a deep correction with the onset of viral panic but it remains within a long-term consolidation. This week has the stock price bouncing from a support level that, if confirmed, could lead Amazon back up to retest the recent highs later this year. Considering the growth outlook, I would not be surprised to AMZN hit a new all-time high by the end of 2020.