FAANGS: Roommates, Not Family

By datatrekresearch in Blog FAANGS: Roommates, Not Family

Our readers know that once something becomes common wisdom we immediately start tearing it apart like a puppy with a new toy. We simply can’t help ourselves. And, more often than not, we find something unexpected.

Today’s example is the “FAANG” stocks – Facebook, Amazon, Apple, Netflix and Google. History is mum on who invented this moniker (we want to say it was Jim Cramer). But it clearly has become “a thing”, as the millennials say.

We ran the correlations for each of the FAANGs against each other since the start of 2017 (long run) and just for the last 30 days (short run). Our question: just how much do they actually trade as a group?

The short answer is that even though the 5 names share a nominal “Home” in FAANG world, they are more Craigslist roommates than nuclear family. Here’s the data (full correlation grids are at the end of this section):

The average long-term (2017-present) correlation for the 5 names is 0.55, or an r-squared of 30%. For a comparison, consider that the correlation of the Tech sector to the S&P was 0.82 as of mid month, or an r-squared of 67%.

The average correlation of the FAANG names over the last 30 days is 0.60, a modest uptick over the long-term record, but still just a 36% r-squared.

We expected these numbers to be much higher (more like 0.7 to 0.8) given how much they seem to move in concert and because they all live in the “Tech” bucket. The data clearly shows otherwise.

Now, between these 5 names, there are some notable variations from the averages:

Google has the highest long-run (2017 – present) average correlations to the other 4 names, at 0.62. Much of that comes from how closely it tracks Facebook (0.70 correlation) and Amazon (0.65).

Apple has the lowest long-run average correlation to its FAANG peers, at 0.48. That comes from an exceptionally low reading versus Netflix (0.40) and Facebook (0.47).

Over just the last month, Amazon has the highest average correlation to its peers, at 0.68. Apple retains its title as least-correlated FAANG stock, at 0.52. Google (0.65), Facebook (0.57) and Netflix (0.56) are in between.

Here’s what we make of this data from a fundamental perspective:

#1. Amazon has recently become a full-fledged Tech/Media stock, with the highest correlation to Google (0.70) and Netflix (0.77). It is also, for lack of a better phrase, the “FAANGiest FAANG” in the group with the highest correlations to the rest over the last month. This is a new development, with the 2017-present correlations (0.56) much lower than current levels (0.68).

Key takeaway: AMZN has been a great name to own, but the rocket fuel for the next stage of its journey will likely be from its technology and media initiatives rather than online retail. And, of course, any reversal in market sentiment on Tech will rapidly erode the valuation premium it enjoys above being “simply” a category killer shopping site.

#2. Even with being the world’s most valuable public company and a Tech sector standard bearer, Apple continues to march to its own drum. We did not expect that, but in hindsight it makes sense given its unique edge in global mobile handsets and, increasingly, services. Its differentiated view on consumer privacy seems to help as well.

Key takeaway: lower correlations make Apple “easier” to own than any other FAANG name in a portfolio that already has exposure to these companies. This was the case both over the last 18 months and just the last 30 days as well. That’s not enough of a reason to own a stock, of course. But it may signal that Apple will be one place investors hide in any meaningful Tech pullback.

#3. Summing up: for all the attention around FAANGs, they remain different companies with varying fundamentals and day-to-day price performance. Yes, they are beginning to cluster up a little more as Amazon shifts to being a “Full” Tech company. But they are not (yet) statistically tied at the hip.