For 2018, consider de-FAANGing your portfolio.
The FAANG stocks — Facebook Inc. FB, -0.07% , Amazon.com Inc., Apple Inc.AAPL, +0.86% Netflix Inc. NFLX, -1.83% and Google parent Alphabet Inc.GOOGL, -0.50% GOOG, -0.50% GOOG, -0.50% — have had a blowout 2017, rising as much as 73%.
Michael Schroer, chief investment officer at Renaissance Investment Management, says other growth stocks are at least as attractive because they’re more cheaply valued.
First, here’s a look at price-to-earnings ratios and sales growth for the FAANG stocks:
|Company||Ticker||Price/consensus EPS estimate for next 12 months||Forward P/E ratio a year ago||Sales growth – most recent reported quarter from year earlier||Total return – past 12 months|
|Facebook Inc.||FB, -0.07%||27.5||22.6||47%||55%|
|Amazon.com Inc.||AMZN, -0.89%||150.9||84.4||34%||58%|
|Apple Inc.||AAPL, +0.86%||14.8||11.6||12%||65%|
|Netflix Inc.||NFLX, -1.83%||90.4||127.9||30%||73%|
|Alphabet Inc. Class A||GOOGL, -0.50%||25.9||18.7||25%||38%|
|Alphabet Inc. Class C||GOOG, -0.50%||25.5||18.3||25%||39%|
The S&P 500 Index SPX, -0.55% trades for 18 times weighted aggregate earnings estimates for the next 12 months, rising from 16.5 a year ago, according to FactSet.
Looking at the very high valuations for Amazon and Neflix, it’s obvious that investors are rewarding innovation as well as sales growth. Both companies have disrupted entire industries.
Renaissance Investment Management is headquartered in Covington, Ky., and manages about $5 billion for institutional and private clients. Schroer manages the AMG Renaissance Large-Cap Growth Fund MRLTX, -0.36%
In an interview on Nov. 15, Schroer said that “a lot of attention has been focused on very large-cap companies selling above 30 multiples. While we have some of those stocks in our portfolio, there are others that are reasonably priced.”
Schroer joined the firm in 1991, when it began its large-cap growth strategy. The AMG Renaissance Large-Cap Growth Fund was established in 2009, and has $182 million in assets. As of Oct. 31, two of the fund’s 56 equity positions were FAANG stocks: Apple, the second-largest position, and Facebook, the 11th-biggest position, according to Morningstar.
Large-cap growth stocks with more compelling valuations
Schroer named three growth companies with shares he believes are attractively priced to earnings estimates, as well as free cash flow:
|Company||Ticker||Price/ consensus EPS estimate for next 12 months||Forward P/E ratio a year ago||Sales growth – most recent reported quarter from year earlier||Total return – past 12 months|
|Applied Materials Inc.||AMAT, -1.15%||15.1||12.8||33%||97%|
|Lam Research Corp.||LRCX, -0.37%||14.3||12.8||51%||115%|
|Dollar General Corp.||DG, -1.14%||16.9||16.0||8%||10%|
Applied Materials Inc. AMAT, -1.15% and Lam Research Corp. LRCX, -0.37% make equipment used to fabricate semiconductors.
Both companies are “exposed to a growing area of the economy,” Schroer said, and underlined his opinion that in the large-cap space, there’s better value to be found in large-cap computer hardware manufacturers than in tech services companies right now.
Schroer said that Applied Materials is “a bit broader” in its product offerings, but Lam Research’s shares are “a bit cheaper,” and you can see that its sales were up more during the most recently reported quarter.
Dollar General Corp. DG, -1.14% is unique among brick-and-mortar retailers, as it’s on track to add 1,000 new stores this year. But Schroer is also impressed with the company’s same-store sales growth, which was 2.6% in its fiscal second quarter that ended Aug. 4.
Here are the top 10 holdings of the AMG Renaissance Large-Cap Growth Fund as of Oct. 21:
|Company||Ticker||Share of portfolio||Price/ consensus EPS estimate for next 12 months||Forward P/E ratio a year ago||Sales growth – most recent reported quarter from year earlier||Total return – past 12 months|
|Microsoft Corp.||MSFT, -0.78%||2.1%||23.6||19.0||12%||48%|
|Apple Inc.||AAPL, +0.86%||2.1%||14.7||11.6||12%||65%|
|Lam Research Corp.||LRCX, -0.37%||2.0%||14.3||12.8||51%||115%|
|Ameriprise Financial Inc.||AMP, +0.18%||2.0%||12.3||11.4||9%||41%|
|Total System Services Inc.||TSS, -0.50%||2.0%||20.2||15.7||9%||52%|
|Synopsis Inc.||SNPS, -0.15%||2.0%||24.6||18.3||13%||47%|
|Rockwell Automation Inc.||ROK, -1.49%||2.0%||25.3||21.7||8%||48%|
|American Express Co.||AXP, -0.53%||2.0%||14.6||12.9||9%||32%|
|Skyworks Solutions Inc.||SWKS, -2.09%||2.0%||14.8||11.8||18%||52%|
|Cigna Corp.||CI, -0.32%||2.0%||17.5||14.5||5%||45%|
Looking ahead to 2018
Getting back to the overall market’s valuation, the S&P 500’s forward P/E ratio has increased significantly over the past year, but it is still below that of the late 1990s:
But one similarity Schroer sees in both markets is a focus by investors on the largest technology companies. This underscores his preference for growing companies with lower valuations for long-term investments.
Another concern of his is that inflation is picking up, making it possible that the Federal Reserve will be “more comfortable” in raising interest rates.
Still, Schroer doesn’t expect rising rates to hold back the stock market, as long as inflation is tempered.