FAANG or WABUA? A Revenue Lens on Market Leaders

When CNBC analyst Jim Cramer and Realmoney.com’s Bob Lang concocted the FANG group in 2013, originally without Apple, they couldn’t have imagined the four stocks would earn a sizzling 691%, on average, over the next five plus years.(2) A brilliant call indeed, but was there any fundamental anchor associated with the selection? Lang, a talented market technician, noted that these four securities had strong momentum signals, and he was right. However, as cracks have begun to emerge in the famed momentum trade, we can see that, in the words of Bob Dylan, “The Times They Are a-Changin’.”

One way to combat changing momentum and uncover opportunities is to keep a close watch on fundamentals and price in tandem. Analyzing free cash flow yield (FCF Yield), or the percentage of shareholder equity that companies earn in free cash, is one way to do this. Companies can use this free cash to pay immediate cash dividends or fund internal growth. Exhibit 3 shows how an equally weighted WABUA portfolio offers more than twice the FCF Yield of an equally weighted FAANG portfolio, potentially positioning the WABUA group to benefit as investor moves cause the momentum landscape to shift.


Revenue-Weighting Anchors Exposure in Bedrock Fundamentals

Compounded earnings growth happens over the course of years, not days, but that doesn’t mean we can’t assess along the way. Given the enormous fundamental and share price growth the FAANG group has seen over the past few years, this may prove an opportune time to analyze the fundamentals of these companies alongside their market caps. For investors seeking a FAANG alternative, weighting portfolios by revenue rather than market cap grounds the equity portfolio in the fundamental bedrock of top-line sales, which could prove effective as valuations become increasingly stretched.

  • ^Morningstar, as of 8/31/18, measuring the S&P 500 Index
  • ^Morningstar, measuring cumulative return for Facebook Inc A, Alphabet Inc A, Netflix Inc, and Amazon.com Inc from 2/6/2013 – 8/31/2018

This article was republished in full with permission from OppenheimerFunds.