once bitten: will the “FANGs” keep feasting?

Jim Cramer has been talking up what he calls the “FANG” stocks again: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG). Cramer has touted these stocks for several years now, and for good reason. They’ve far outpaced the market in that time. Throw in a second world-beating “A” stock, Apple (AAPL), and the five companies are worth a staggering $1.8 trillion in combined market capitalization, or roughly 17 percent of the NASDAQ composite and 9 percent of the S&P 500.

There’s no doubt about it: if you haven’t been in these stocks over the last few years, it’s been damn near impossible to beat the indexes. (And God help anyone who dared to short them.) But, past results aside, will the FANG stocks continue to bite off big gains in the future? Investors certainly seem to think so. Facebook’s early struggles as a public company seem like ancient history. Last week, Google added almost $60 billion in market cap in a single day and Netflix popped ten percent on strong user growth. As for Amazon, it just keeps heading higher and higher, profits be damned.

By the fundamentals, buying into these stocks at today’s lofty prices seems foolhardy, at least at first blush. All of them trade at much higher price to cash flow and market cap to revenue multiples than the wider S&P 500. Then again, they all possess competent, highly educated managements, outstanding boards of directors, and businesses that could continue to generate lots of cash for years to come. As a group, they are also relatively unburdened by debt, something you can’t say for many other NASDAQ concerns.

Nonetheless, the hype and hoopla over this quartet is giving me a little bit of what Yogi Berra called “déjà vu all over again.” Before we had the toothsome acronym FANG, the much-celebrated “Four Horsemen” of the tech world were Intel, Microsoft, Sun Micro and—yep—Amazon. Like the FANGs, those stocks significantly outperformed a very bullish market—and if you’d bought them back when they were making all-time highs at the end of 1999 like the FANGs are now, you would have been trampled under foot. Ten years later, Amazon had doubled, but Microsoft had dropped 36%, Intel had declined 50%, and Sun—which many people considered the strongest of the group—had fallen over 75% before being bought out by Oracle.

I doubt today’s FANGs will suffer apocalyptic losses like Sun. I’m just pointing out—quietly—that there is no guarantee that these leaders will continue to devour the indexes like they have been up to now. If anything, their lofty valuations make them susceptible to under-performance when (or, rather, if) stock markets suffer a multi-month correction. If a full blown bear market comes to town and claws down prices 20 percent or more, the FANGs could get mauled as badly as Intel and Microsoft did during the last tech wipeout. A lot of younger investors probably can’t imagine such a negative scenario. Neither could the folks who climbed aboard the Four Horsemen when they were running wild.