The acronym FANG has come to represent all mega-cap technology companies in the U.S. But officially it includes — Facebook (NADSAQ:FB), Amazon (NADSAQ:AMZN), Netflix (NADSAQ:NFLX), and Alphabet (NADSAQ:GOOGL,NASDAQ:GOOG) — and Apple (NASDAQ:AAPL) when it is written as FAANG. This market-wide correction presents us with opportunities in FANG stocks. Yes, we still have uncertainties in the U.S. economy but the mega-caps in question today are as healthy as ever.
They have thriving businesses, healthy balance sheets, and they continue to execute on plans flawlessly. However, I caution against betting on NFLX. This is the exception to the rule and I argue that it doesn’t belong in this collective. NFLX has shaky financials and massive new competition at its doorstep. And going into the earnings, if management hiccups the stock is vulnerable to a 20% correction or more.
FB, GOOGL and AMZN on the other hand have incredible cash flows to sustain their growth. So today I discuss the opportunities to catch these three falling knives. But first, it is important to note that the outcome of this week for equities is binary because of the potential headlines coming from the ISM and jobs payroll numbers today and tomorrow. Negative reports will cause short-term dips even in the best of stocks.
Therefore investors should be wary of timing and temper their conviction levels. We don’t know what the headlines will be, and more importantly we don’t know how the markets will react to them. Even too much good news may be construed as bad. For example, a job report that is too strong may cause fear in stocks because it could mean that the Federal Reserve is done cutting rates this year. Nevertheless, the overall bullish thesis is still alive and one report is not going to confirm that we are headed into a sharp recession soon.
FB has billions of active users who spend hours daily engaging on their platforms. So it will take a special kind of circumstance to break such potential. So by definition, FB stock is one to own for the long term. Last year, investors in the U.S. mistakenly handicapped FB stock from its privacy issues. The bulk of Facebook users are overseas and they don’t care as much about the Cambridge Analytica issue as we think they do. So this phantom problem does very little to impact the FB bottom line.
Meanwhile, the FB fundamentals are very strong. This is an advertising behemoth that has no equal. I have had conversations with some of its clients who are having tremendous success using it for all their advertising needs. They can reach their target audience quickly and efficiently so they are in it for the long haul.
So the bullish thesis to trade FB here is easy. If the markets are higher, then FB stock is definitely higher in spite of all the negative rhetoric in the media. At $175 per share, FB is a bargain and it’s worth to start buying the shares into the earnings. I don’t take a full position at once. It is important to note an open gap at $152.50 so there could be more short-term weakness — especially if this market wide malaise continues.
GOOGL search business is an incredible cash cow especially mobile. It generates enough cash to grow its businesses for years to come. The only concern I have for GOOGL stock is from the impact that FB will have on its business. But I believe that Google is diversifying its income stream enough to be able to adjust to any major shifts in its sector.
Nevertheless, there are some concerns short-term. So instead of spending $1,178 per share to buy GOOGL stock, I’d rather sell downside puts into what others fear. This way I can generate income without any money out of pocket. For example I can sell the January $950 put and collect $10 for my efforts. This way I am bullish the stock but with a 20% buffer between current price and my risk level.
The advantage here is that I don’t even need a rally to win. If GOOGL stock stays above my strike then I retain my maximum gains. Otherwise, I own the shares at $950 I accrue losses below $940 per share. Short term, GOOGL is back to a level that was important late August. Often this would act as…
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