Welcome to Authers’ Note, in which I will attempt to provide some context and analysis on the world of investment each day, and provide you with a handy guide to the best coverage on offer, both here in the FT and elsewhere. All feedback is welcome, particularly of the constructive variety, as we try to get this right. (Email to authersnote@ft.com).

March concluded with the downfall of the Fangs — a group of strongly performing internet stocks that initially included Facebook, Amazon, Netflix and Google, and now often includes a few other names. They led the market for several years and then suddenly they crumbled. A number of catalysts, including Facebook's Cambridge Analytica scandal, President Trump's attacks on Amazon, and well publicised accidents involving self-driving cars, all contributed.

But if that was the Fangs' downfall, it could have been far worse. This is how the NYSE Fang+ index (which also includes Tesla, Apple, and the Chinese internet groups Alibaba and Tencent) has fared compared to the S&P 500:

The Fangs' outperformance of a dramatically rallying market in the months since President Trump's election remains remarkable, and largely intact. Even Facebook has recovered some lost ground since its CEO testified (robotically) to Congress this week. Even as the overall market is down for the year, Netflix and Amazon, currently the most successful of the Fangs, are up 62 and 22 per cent respectively. This was not exactly the Twilight of the Gods

Unfortunately, there is still a lot of room below. History, and the Fangs' accounts, suggest that their dominance will pass. That is the main takeaway from the analysis of the Fangs (concentrating on Facebook, Apple, Amazon, Netflix and Google) by the Holt team at Credit Suisse.

Historically, there are plenty of instances where the top value-creators in the US market have commanded a bigger slice of the overall region’s market cap but resisting competitive pressures is the exception rather than the rule in the long-run. And today, of the 5 FAANGs, only Amazon and Netflix are expected to improve their CFROI® yoy in 2018. It is perhaps for this reason that throughout history, the largest accumulators of Economic Profit have almost never commanded excessive valuation premiums — i.e. the market recognises that returns/growth will inevitably fade. Better therefore to identify stocks at the earlier stage of their lifecycle with an improving value-creation track-record rather than those already scooping up the riches. There is little doubt that the growth in the overall weight of FAANGs’ market cap over the last 20 years as a % of the total US market has been remarkable. Driving this, the groups' % of total Economic Profit (excess returns x gross investment) in the US market has grown to over 10% over the last three years.

CFROI refers to the Holt cash flow return on investment measure of profitability. And as these charts show, the Fangs have made a lot of money in the recent past:

What is interesting, compared to history, is that the biggest creators of value, or economic profit as measured by Holt, are far less concentrated now than they used to be. Hence they make up a smaller proportion of the overall market. This is because more companies are managing to exceed their cost of capital, which may in turn be because of measures that make it cheaper to run a large company. Also note, however, that only three of today's top five companies are Fangs. Microsoft (which some might include as a Fang) and Johnson & Johnson make the list: 

Today, many more companies are clearing their cost of capital (lower cost of capital environment, outsourcing, more IP-based companies). High value-creation is indeed broad enough today for neither Netflix nor Amazon to make it into the top 5 value-creators in the US — that honour goes to Microsoft and Johnson & Johnson, alongside Facebook, Apple and Alphabet.

For current purposes, the salient point is that dominance is seldom sustained. Relative share price performance tends to decline once a company has become dominant, or an industry "titan".

History also suggests that most companies will not sustain abnormally high levels of Economic Profit in the long-term. And here, irrespective of the FAANGs' competitive positioning today, the historical evidence is pretty damning. Over the last 68 years, 49 companies have made it into the top 5 value-creators in the US market and have held on to that position for an average of only 6.5 years — the biggest exceptions being IBM (35 years in the top 5), General Electric (26 years), General Motors (24 years), Altria (23 years) and Exxon (16 years). In Europe ex UK, over a shorter 34 year period of HOLT data, the data shows even more churn in the top 5 (30 different names) with Nestlé, Unilever, Roche and Novartis making it into the top 5 for over 10 years, and the average tenure in Europe otherwise stands at 5.5 years.

It may have felt like it for a day or two, but what we have just witnessed was NOT the Fall of the Fangs. That dramatic event still lies ahead. And it may yet be a Wagnerian drama when it arrives.

This wasn't supposed to happen

JPMorgan produced results today, and they were really good. This was our headline:

So what happened next on the stock market? This:

As the young Bjork would have said, this wasn't supposed to happen. And other banks had a similarly miserable time. It is very early days yet, but this suggests that the earnings expectations bar has indeed been set very high for companies in the coming earnings quarter. It also shows, I suspect, that the banking sector is overvalued.

This is the price/book multiple of the KBW index of big US banks. The "correction" has brought us back merely to the beginning of the year, while the huge shift in banking valuations that followed the election remains intact. 

This is largely driven by rate expectations. Further rises in longer bond yields and a steeper yield curve would help banks' profits and their valuations. Banks make their profits in large part from the difference between long- and short-term rates. But sadly, the yield curve (as in the gap between 2- and 10-year yields, today dropped to its flattest since the crisis. 

Not good, as someone might say. But it is still very early days. We will have a far better picture of the health of the corporate sector, in the US and the rest of the world, in two weeks' time. 

Have a good weekend.

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