Once upon a time, over at a website frequented by netizens who enjoy keeping up with the latest on sports, luxury cars, and hip hop, there was a popular meme that featured NBA legend Tim Duncan throwing up his hands in disgust.
The look on Duncan’s face seemed to say “I can’t even fathom this, so I’m not going to touch it.”
Here is that picture:
Well, that’s kind of how I feel about a new note out from Citi in which the bank takes the absurdity inherent in the market’s obsession with FANG/ FAAMG up a notch by dedicating an entire discussion to a basket of stocks the bank calls “FANTASY”.
Those stocks are (Facebook, Amazon, Nvidia, Tesla, Alphabet, Salesforce.com and Yahoo) – hence the acronym.
This is the same old story. As Citi notes, FANTASY names (and yes, that’s just as funny as it sounds) “have added about $380 billion to the S&P 500’s market cap (ex-Tesla) thus far this year, accounting for roughly 23% of the market cap gain of the index.” Clearly, that raises questions about the sustainability of the rally.
I honestly don’t know what exactly it is Citi is trying to say in the excerpts below (maybe you can decipher it), but what I do know is that tossing around that acronym makes for all manner of hilarious sentences like this one:
There is only modest FANTASY distortion on valuation for the broader market.
And this one:
The non-FANTASY included multiple might be closer to 20.8x.
The US equity market’s ascent has been heavily influenced by the IT sector this year, as so-called “Trump trades” have reversed since early 1Q17. While interest rates have been a key cause of the rotation within indices, there has been wide dispersion of performance amongst the sectors, especially Energy’s losses relative to the tech sector’s gains being reminiscent of the late 1990s. Nonetheless, lower long bond yields (and discount rates) argue for a higher present value on the future cash flow streams of secular growers given the math of compounding.
Secular growth companies get extraordinary valuations as the dreams of the future make it harder to use traditional metrics and can affect the overall US equity market’s P/E modestly. The market cap weighted P/E of the FANTASY stocks (Facebook, Amazon, Nvidia, Tesla, Alphabet, Salesforce.com and Yahoo) stands at a hefty 61.7x trailing earnings versus the S&P 500’s 21.6x ratio, causing some numbers bias. Moreover, the combined market capitalization of the FANTASY names (at $1.8 trillion), is up near 30% year-to-date, and accounts for a large chunk of the overall index’s gains (Tesla is not in the S&P 500)
In our opinion, the powerful growth stories centered on software, social media and the spread of technology into all aspects of daily living have blossomed and captured investors’ imaginations. The Street has become enamored with what we have dubbed the FANTASY stocks, which have added about $380 billion to the S&P 500’s market cap (ex-Tesla) thus far this year, accounting for roughly 23% of the market cap gain of the index. But, it is not a fair statement since other names like Exxon have dropped meaningfully dragging down the index while Wynn Resorts has pulled it higher. Note that more than half of the S&P 500 constituents have beaten the market year to date and 30% have generated negative returns. Accordingly, there have been far more winners than losers in 2017 thus far.
There is only modest FANTASY distortion on valuation for the broader market, but the potential for a reversal of the sector rotation towards growth over the past few months exists. Figure 3 provides some insight into the valuation and market caps of the FANTASY names, recognizing Tesla is not part of the S&P 500 and that Alphabet is not as highly valued. Furthermore, the market cap weighted P/E of the FANTASY components runs at about 61.7x versus 21.6x for the overall index (using trailing four quarters EPS). The non-FANTASY included multiple might be closer to 20.8x, still not “cheap” per se but a bit less elevated than feared. More critically, tech stocks as a whole are not as outrageously priced versus levels seen back in 2000 (see Figure 4).
What say you Tim Duncan?…