First published at ValueWalk.com
2015 has been the year of the FANGs, (Facebook, Amazon, Netflix and Google), which collectively are up 86% in 2015. FANG names plus six other high-growth plays added 74 points or 3.6% of S&P 500 returns as investors followed the ‘growth at any price strategy.’
But Fundstrat’s Tom Lee believes that the FANG group will struggle in 2016 as value is set to stage a comeback.
See also: Is Value Set For A Comeback?
FANGs rarely repeat outperformance in the following year
Tom Lee highlights several key points which support his argument that the FANGs will underperform in 2016, and let value lead the market instead.
First off, since 2005 the top 10 winning stocks of one year, always underperformed the following year by an average of 290bp (48% win-ratio). For example, last year, the best-performing stocks of 2014 subsequently turned into the worst drags in 2015.
Since 2005, the top ten stocks underperformed the S&P 500 by 290bp on average in the following year. Figures show that the odds of FANGs outperforming again is 48%. That means the group as a whole has a 52% chance of underperforming the S&P 500 by 290bps next year. The odds are against further outperformance.
Value is set for a comeback next year
With the figures suggesting that FANGs will underperform next year, Fundstrat’s Tom Lee sees value outperforming for the year. Why? Well, FANG names now trade at an eye-watering average forward P/E of 100 and each FANG name is a member of the Growth Index. These stocks account for 9% of the Growth index, which means that they’ve done much of the heavy lifting for the index during the past twelve months.
If the FANGs underperform next year, the headwind against value should be significantly lessened, which could ultimately translate into improved performance for value stocks. Once again, figures going back to 2005 show that when growth struggles, value usually outperforms.
Stock Strategy: 9 Stocks
With value set for a comeback next year, Fundstrat screened the market for those stocks that are most likely to benefit and chalk up a positive performance. Tom Lee and his team screened the market for the stocks that met the following criteria:
- Stock is one of the bottom 25 contributors to S&P 500 point change YTD 2015;
- Stock’s dividend yield is greater than its bond yield (hat tip to Benjamin Graham);
- Market cap is, at least, $10B; and,
- Positive implied upside (based on analyst price targets).
Here are the nine stocks that qualify. At the time of writing the author is long IBM and CVX.