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Nov. 21, 2016, 6:25 p.m. EST

Trump’s toothless FANG challenge creates an opportunity in high-flying internet stocks

Facebook, Amazon, Netflix and Alphabet have fallen since the election, but investors’ reaction is overdone

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By Michael Brush, MarketWatch


/H. ARMSTRONG ROBERTS/CLASSICSTOCK/Everett Collection
Facebook, Amazon, Netflix and Alphabet — aka FANGs — have declined on fears that Donald Trump will create trade barriers or regulations that could hurt Silicon Valley companies.

Did Donald Trump defang the FANGs?

The most popular Internet stocks have been duds since the presidential election. While the broader stock market has risen 3% or so since then, the so-called FANGs — or Facebook, Amazon.com, Netflix and Alphabet — are down as much as 7%.

What’s going on?

“There is a view that they are going to be disadvantaged under a Trump administration,” says Larry Puglia, who manages the T. Rowe Price Blue Chip Growth Fund /zigman2/quotes/208533233/realtime TRBCX +0.98% . “But I don’t really see it that way.”

Puglia thinks investor fears are exaggerated, and that the FANGs will continue to be the kind of “durable growth” companies he likes to own.

If he’s right, that means the FANGs are buyable in the current weakness. I’ll walk though his logic below. But first, I’ll point out that Puglia is well worth listening to.

For one thing, he is one of the biggest fund managers on the planet. He has $55 billion under management, including the $32.6 billion in his T. Rowe Price Blue Chip Growth Fund. (The rest: managed accounts.) He’s got years of experience in the business. And his fund beats competing funds by 2.6 percentage points a year annualized over the past five years, according to Morningstar. It also beats competitors over the past 10 years.

Puglia certainly has big FANG bets in place. Amazon.com /zigman2/quotes/210331248/composite AMZN +2.11%  is his biggest position. It occupies a huge 9% of his Blue Chip Growth portfolio. He’s got a 4.9% position in Facebook /zigman2/quotes/205064656/composite FB -0.28% and a 4.3% position in Alphabet /zigman2/quotes/205453964/composite GOOG +0.59% . Those are his top three positions. He also has a large position in Netflix /zigman2/quotes/202353025/composite NFLX -1.48% . (As well as Priceline and Alibaba /zigman2/quotes/201948298/composite BABA +1.03% , other FANG-like stocks that have sold down for similar reasons.)

Puglia is not alone in thinking that investors have it wrong on the FANGs. Baird analyst Colin Sebastian thinks the sector weakness already discounts any elevated risks under a Donald Trump administration.

“We believe that positive secular growth trends will generally override negative forces,” says Sebastian. His favorites in the current bout of weakness are Alphabet and Facebook.

To be sure, these stocks clearly aren’t the buys they were a few years ago when they were truly despised. I first suggested them in my stock letter, Brush Up on Stocks , years ago as contrarian plays when they were really disliked — Amazon.com at $192 in March 2012, recently at $760; Facebook at $25 in April 2013, now $117; Google at about $300 in May 2012, now $776; and Netflix at a split-adjusted $29 in May 2012, now at $115. Those stocks are now up 295%, 368%, 158% and 296%, respectively, compared with about 40% to 70% for the broader market.

If you missed out on those moves or you don’t own FANGs at all, the current weakness offers an opportunity to get a little exposure. (I reiterated Netflix at $91 in July in my stock letter, and I continue to suggest buying it near or below that price.) If you own them and you’re concerned about the current weakness, relax. They should be OK.

To understand more about why current FANG fears are exaggerated, I recently sat down with Puglia in New York City to talk about the risks. Let’s work through the fears about these names one by one.

FANG fear No. 1: There will be an antitrust crackdown

“People are very, very fearful that Donald Trump will take an antagonistic view toward these companies on an antitrust basis,” says Puglia. To see why, look no further than Amazon.com CEO Jeff Bezos, who owns a big newspaper that Trump does not like.

“The genesis of this is that Jeff Bezos owns the Washington Post, and I think Donald Trump was not pleased with the press coverage he was receiving from the Washington Post. And he made a comment that Amazon, in his view, might have an antitrust issue,” says Puglia.

Investors also know that Trump has been a vocal critic of the proposed merger between AT&T /zigman2/quotes/203165245/composite T -0.53%  and Time Warner , points out Sebastian, the Baird analyst.

But could there really be an antitrust crackdown on the FANGs? “I don’t believe that, frankly,” says Puglia. “All of them have a large and growing market share. But based on the way we look at the antitrust laws, none of them are in violation, or close to being in violation.”

FANG fear No. 2: An immigration crackdown will hurt them

All of the anti-immigration rhetoric has investors worried that the FANGs will have even bigger challenges finding talented coders and other kinds of engineers, who are in short supply domestically. They like to hire those employees from abroad, because they are hard to find in the U.S.

/zigman2/quotes/208533233/realtime
US : U.S.: Nasdaq
$ 151.76
+1.47 +0.98%
Volume: 0.00
Aug. 5, 2020
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 3,205.03
+66.20 +2.11%
Volume: 3.93M
Aug. 5, 2020 4:00p
P/E Ratio
123.20
Dividend Yield
N/A
Market Cap
$1572.21 billion
Rev. per Employee
$359,671
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 249.12
-0.71 -0.28%
Volume: 13.09M
Aug. 5, 2020 4:00p
P/E Ratio
30.43
Dividend Yield
N/A
Market Cap
$711.72 billion
Rev. per Employee
$1.57M
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,473.61
+8.64 +0.59%
Volume: 1.98M
Aug. 5, 2020 4:00p
P/E Ratio
32.87
Dividend Yield
N/A
Market Cap
$999.82 billion
Rev. per Employee
$1.39M
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/zigman2/quotes/202353025/composite
US : U.S.: Nasdaq
$ 502.11
-7.53 -1.48%
Volume: 4.31M
Aug. 5, 2020 4:00p
P/E Ratio
84.71
Dividend Yield
N/A
Market Cap
$224.76 billion
Rev. per Employee
$2.22M
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/zigman2/quotes/201948298/composite
US : U.S.: NYSE
$ 264.91
+2.71 +1.03%
Volume: 10.73M
Aug. 5, 2020 4:00p
P/E Ratio
32.92
Dividend Yield
N/A
Market Cap
$702.83 billion
Rev. per Employee
$781,259
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/zigman2/quotes/203165245/composite
US : U.S.: NYSE
$ 29.85
-0.16 -0.53%
Volume: 22.99M
Aug. 5, 2020 4:02p
P/E Ratio
18.25
Dividend Yield
6.97%
Market Cap
$213.82 billion
Rev. per Employee
$637,332
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