The DAMN Stocks – Finding risk substitutes

By Paul Gambles 

At the end of October last year, we issued a client note wondering whether it was time for the ‘FANGs*’ to jettison their underperformers (Facebook & Alphabet) and replace them with Domino’s Pizza & Microsoft – Noting that FANGs would have to be renamed DAMN stocks. The correlation was there, and with the FANG’s looking bubbly, our substitutes served to reinvigorate and to reduce some of that downside risk.

*The informal grouping of technology and consumer discretionary stocks that typically comprises some combination of Facebook, Apple or Amazon, Netflix and Google. The terms FANG (or FAANG to include both Apple & Amazon) were reportedly coined by CNBC host, Jim Cramer.

DAMN Stocks

At the time, we explained why Domino’s Pizza (DPZ) could claim to be an alternative ‘FANG’* and why we thought that most of the actual FANGs faced headwinds. While two months is too short a time to draw any conclusions (unless you’re a day trader, or ‘Robin Hooder’**), so far, FB is down almost 9% and Alphabet over 1%, while MSFT and DPZ are slightly higher, even more so on a total return basis, taking into account dividends.

Disclaimer: MBMG Investment Advisory maintains a relatively favourable appraisal of Domino’s Pizza (DPZ)

*In short, while DPZ is widely perceived to derive competitive advantages from sector-leading deployment of technology and artificial intelligence, we believe that the similarity in performance between DPZ and FANG stocks to mid-2020 was mainly due to the high degree of financialization deployed by DPZ (such as relatively high leverage  of capital and aggressive stock buyback programmes) 

** Users of the popular online stock trading application, Robin Hood

Bite size – Ali Baba another tech antidote

More recently, we have sent out communications highlighting the differential in recent stock performance between Chinese e-commerce giant, Ali Baba (BABA, black line below), whose share price had previously reflected its domination of the Chinese and emerging Asian digital sectors with both the broader Chinese/Emerging Market Internet Sector (EMQQ, Blue) but also with the much vaunted FANGs (NYFANG, Orange). While we see some very well-publicised potential regulatory challenges ahead for Ali Baba*, we believe that Ali Baba might be better able to withstand these than the broader Emerging market digital sector (although investors wishing to hedge their bets might want exposure to both) and we believe that Ali Baba may be more reasonably priced at this time than FANG stocks in view of their extreme run up in late 2020.

Disclaimer: MBMG Investment Advisory has recently issued to clients whose criteria are considered appropriate, a relatively favourable appraisal of Ali Baba Holdings (BABA)

*Ali Baba had to cancel its intended spin off its lending and digital payments subsidiary, ANT Financial due to the withdrawal of Chinese Government regulatory approval, following which the group’s charismatic founder, Jack Ma, has had to take a lower profile, and more recently, it has been threatened, along with other Chinese stocks, with being delisted from US exchanges as part of the outgoing Trump regime’s ‘trade war’. However, FANGs also face regulatory and operational hurdles and we believe that the price differential might overstate the relative risks facing

AOFB (Any Other Funny Business)?

Around the same time as the note about Domino’s Pizza as an Alt-FANG, we also produced the graphic shown below, highlighting the 25% one day fall in the share price of share alternative burger producer Beyond Meat (BYND). We like the concept of meat substitutes but BYND struck us as a stereotypical example of the kind of excessive price behaviour that we have seen in certain stocks, especially consumer discretionary/tech stocks, and above all so-called ‘disruptive’ technology stock prices.

This is produced for information only and does not constitute a formal buy or sell recommendation.

LoTo Infinity and Beyond ?

But while Beyond Meat (BYND, Black line below) and FANGs are facing down their own challenges, the stock that was really the poster child for excess in 2020 has continued to go from strength to strength (despite no really new fundamental news that would support or justify this. Tesla (TSLA, Orange) may continue to move higher on ever inflating expectations that Elon Musk can change the world and revolutionize transport. If it doesn’t, then it might have a long way to fall:

This is produced for information only and does not constitute a formal buy or sell recommendation.

When it became clear that BYND’s financial results wouldn’t be able to satisfy investors’ highly charged expectations, BYND’s share price fell and today it remains around 1/3 below the level of Early October. For Tesla,  a similar disappointment, relative to its October price, would equate to a fall of around 65%. But of course Tesla is very different to BYND- for one thing the expectations are much higher and therefore any disappointment could be even greater!

Cheap as Blue Chips?

Right ‘blue chip’ assets (such as low volatility dividend stocks) look reasonable value, having underperformed high growth, high Beta, high momentum sectors. Invesco’s S&P 500 High Dividend Low Volatility ETF (HDLV, Blue line below) is down 13% over the past 12 months partly due to this ETF’s utilities and infrastructure holdings being negatively impacted by Covid-19, as opposed to the broader S&P 500 Index (Orange) which is up 17.7%. With the expected vaccine rollout, we see a greater chance of improved earnings/dividends and consequent upside than downside for both these sectors and other holdings, such as consumer staples. HDLV has recovered 4% YTD and we believe the price of this ETF may well have passed its low point. More defensive HDLV seems relatively more attractively priced than growth stocks, like FANGs, and could be another antidote for high risk.

It’s not unfathomable that high alpha/beta may rotate back into large-cap, high yield given stimulus and ongoing ultra low US interest rates.

© MBMG Investment Advisory January 2021

This extract is not intended as investment advice, all disclaimers apply. E&OE, no liability accepted