Want market-beating returns from relatively safe stocks? From now on, you’ll have to look beyond the FANGs

 

Rarely in history have the biggest companies trading on Wall Street also been the ones to offer the best returns, but so it has been for the past couple of years. Leading the way have been the so called “FANGs,” these being Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Google (GOOGL). All four have greatly outperformed the S&P 500 since the beginning of 2017, even Google, which has been the laggard of the bunch.

The problem? Well, it’s really four separate problems. To change itself into Alphabet, Google chose to split into separately managed business groups. The idea was to let each group maintain the aggressive growth spirit of a small company, so that the larger company wouldn’t stall out due to sheer size. The decision was widely praised at the time, but the rationale always seemed more like superstition than logic to me. It certainly hasn’t created any sort of new energy or growth spurt for the company. In fact, Google has seemed, if anything, more stodgy and calcified since it became Alphabet.

Amazon.com is doing well, but the stock is already up more than 50% year to date, and that seems a bit excessive, even to an AMZN fanboy such as myself. Facebook? Well, it took a big hit when it got hauled in front of congress, and privacy concerns may yet lead to regulatory action. Finally, and most obviously, there is Netflix, which, of course, missed its second quarter subscriber growth forecast by 19% last Monday.

I’ll continue to offer small cap ideas for the back of your portfolio, but today, I’m offering large cap ideas for the front of your portfolio—stocks which will serve the same function as the FANGs, without the baggage. As an afterthought, I decided to see if the first letters of my five company names could be arranged into a memorable word, and, as it happens, they can. Here, then, are the DAMNS. Enjoy!

Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.

Alibaba (BABA)

Alibaba is often called the Chinese Amazon.com, but as the company does mostly agency business, connecting buyers and sellers, it’s really more like a gigantic, eBay, spanning business to business, business to consumer, consumer to consumer, supplier to business, etc. It’s $38 billion in annual revenue doesn’t come close to matching Amazon’s $193 billion, but that’s OK, because its operating margin is 27%—more than ten times as high as Amazon’s 2.6%. The company’s normalized net income for the 2018 fiscal year, which ended on March 31, was $8 billion, up from $1.3 billion in 2013. Alibaba is the growth story of the decade and it’s far from over. While the company earned $3.70 per share in 2018, analysts are forecasting EPS of $6.57 in 2019 (a 77% increase) and $8.35 in 2020 (a 27% increase). Someone explain to me how a stock with that kind of growth has forward P/E of just 22.

Chart courtesy of www.stockcharts.com

NVIDIA (NVDA)

The FANG stocks are curiously lacking in diversification, but with Alibaba, the DAMNS have Chinese growth on board, and now, with NVIDIA, they also have microchips, and extraordinary ones at that. Back in the nineties, Microsoft and Intel ruled the roost, the software and the hardware, so it seems reasonable that a world-beating chip company could again take its place among the biggest and most powerful of American companies. Well, I say that company is NVIDIA. Over the past three years, demand for its chips has grown to encompass more industries than anyone could have imagined, and that includes multiple new industries that never existed before, but have been brought into existence by the power of those very chips. Of course, NVIDIA still makes the chips that run computer games, and while games sound trivial compared to driver-less cars and the ability to suck money (in the form of cryptocurrency) out of thin air, games are still NVIDIA’s largest source of revenue. For now. The key to NVIDIA’s future growth, however, is the data center market. The unmistakable trend is that data center customers are increasingly more likely to need the specialized the capabilities provided by NVIDIA GPU chips than the basic “ops per second” provided by standard CPU chips. There is no reason to think NVIDIA’s growth is coming to an end, and no reason to believe NVDA stock has stopped its remarkable ascent.

Chart courtesy of www.stockcharts.com

Salesforce.com (CRM)

With Salesforce.com, the DAMNS now include business software, a vast industry touched on only tangentially by the FANG four, the touchpoint being Amazon Web Services. Salesforce is special, however, in that it was the first company to take the cumbersome work of site-installed business computing and move it into the cloud, where the developer can actually see what it’s doing and make whatever modifications are needed. CEO Mark Benioff has said that his vision for the company is “The End Of Software.” After Salesforce.com proved it could be done, the dam burst, and now both the business world and the stock market are full of interesting and promising Software as a Service (or SaaS) companies. Here are a few I identified just last week. So far, however, no one has managed to find a way to knock Salesforce.com from its comfortable position as the industry leader. 

Chart courtesy of www.stockcharts.com

Disney (DIS)

Each of the FANG stocks is, in a way, or in part, a media company, but they aren’t media companies like Disney is a media company. They do not own decades worth of treasured intellectual properties, nor do they have anything like Disney’s powerful current franchises such as Marvel and Star Wars. Now, try to imagine the size and power of the Disney that will emerge after it has acquired the entertainment assets of Twenty-first Century Fox. It will be a media super -conglomerate the likes of which the world has never seen. When investors look back at this moment ten years from now, they’ll be amazed—even appalled—to consider that the trillion-dollar-Disney they know once had a market cap of just $164 billion.

Chart courtesy of www.stockcharts.com

Mastercard (MA)

As stated previously, I’m writing about stocks I own today, payment processing company in my big five, because there is so much happening right now in the industry. Having dismissed Square as too speculative, I was left with a tough choice, as I like both PayPal (PYPL) and Mastercard well enough that I own shares of both. Between the two, PayPal is definitely the “cool” up-and-coming stock, while Mastercard is old news. However, my goal today was not to be cool, but to identify relatively safe stocks that could still grow rapidly, and while Mastercard is more than twice as large as PayPal, and even more deeply enmeshed in our culture, it is also, believe it or not, growing faster than PayPal. While both companies are benefiting from the shift away from paper cash, Mastercard benefits more immediately. It also has a incredible thing going, in that its fees are triggered by one party, the customer, but paid by another, the merchant, which is why, even with all the ways a person can pay for things today, Mastercard can go right on charging high transaction fees with absolutely no fear of a consumer backlash. Now why didn’t the rest of us think of trying that?

Chart courtesy of www.stockcharts.com

Symbols: BABA CRM DIS MA NVDA
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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