Here's My Favorite FAANG Stock...
By Zach Scheidt | August 24, 2017 |

To Buy or Not to Buy? That Is the Question...

Every week, I get plethora of emails asking the same questions...

"When are we going to invest in Facebook?!"

"Why don't you recommend investing in Amazon?"

"Which FANG stocks are your favorite?"

With so many questions, I'd like to address the elephant in the room... FANG stocks -- the $1.648 trillion behemoth...

If you've watched Jim Cramer, you know FANG is an acronym for NASDAQ tech heavyweights that seem to keep going up no matter what the market wants to do.

I am talking about Facebook, Amazon, Netflix and Google.

Four companies. Close to $2 trillion in combined market cap.

Always going up... Always in the news.


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While FANG stocks seem to always be lumped as a single entity, these companies look completely different in terms of business model and financial health.

Some components of FANG are better than others... but the bottom line is I haven't recommended a single position in these highflying tech companies because they don't meet my investing criteria.

For those of you who aren’t Lifetime Income Report subscribers, the pillars are:

-- Buy stocks that protect your capital

-- Buy stocks that grow your income

-- Buy stocks that pay an attractive yield.

If a company doesn't pay a dividend (which FANG companies don't!), it automatically breaks the three pillars for a variety of reasons.

Dividends are a portion of a company's earnings paid out to investors. And if a company doesn't pay out a yield, clearly it cannot grow your income. That fact alone takes care of pillars two and three.

But what about the safety and protection of your capital?

Companies that don't pay out a dividend actually have much more risk than companies that do.

Here's why...

When the stock price drops for a dividend-paying stock, the yield increases. When the yield increases, investors are attracted to the higher yield.

Therefore, the dividend provides a support base for the stock price.

And if you are in a DRIP plan, a drop in the stock price allows you to accumulate more shares at regular intervals, therefore increasing your dividend payments and compounding your returns.

But with FANG stocks and other non-dividend-paying companies, if investors get spooked, there is no benefit to sticking around. Investors will run and the price will plummet.

However, a dividend does not necessarily mean a company is safe. There are plenty of companies that pay dividends and are still risky investments. That's why it's necessary to do a thorough analysis.

But the question is... if FANG stocks did pay dividends, would we buy?

And either way, how do we play the NASDAQ hot streak if we aren't investing in FANG companies?

Here are the answers...

[For the analysis below, let’s assume each FANG company pays a 3.0% annual dividend. And at the end, I will recommend the best way to play the NASDAQ hot streak!]

Facebook
As the world's largest social media platform, Facebook has made a tremendous run these past three years, growing revenue by 52% a year and net income by 89% a year.

These numbers have been reflected in the company's stock price, which has gone up 120% over that same time period.

Facebook trades at a bit of a premium, but it has a good balance sheet with low debt.

According to the three pillars, Facebook would get the green light if they paid a dividend.

Amazon
It was recently reported that Jeff Bezos, the founder of Amazon, passed Bill Gates in net worth.

It makes sense, considering that Amazon has increased its stock price by 224% the past three years and is currently sitting on a $458 billion market cap.

During that time, Amazon has also increased its revenue by 20% a year and net income by 105% a year.

However, it trades at a ridiculous multiple. Its P/E ratio is 179.

Not to mention its margins are extremely low at 1.8%...

Simply put, Amazon as a company is extremely overvalued. But that is not to take away from what the company is doing...

It is destroying the retail space and growing at an extremely rapid rate. However, investors are paying a steep premium to get a piece of the action.

Even if Amazon paid a dividend, we would not be investing directly...

Netflix
Netflix is one of the premier multimedia streaming companies that is taking out the cable industry.

Over the past three years, its stock price has increased by 106%. It is the baby of the FANG stocks, with a "lowly" market cap of $72 billion.

And while it is small by FANG standards, it is still a huge company by market cap and is massively overvalued...

With a P/E ratio of 214, high debt and low margins... Netflix is already into bubble territory.

Even if it paid a dividend, we would take a hard pass.

Google
As the largest of the FANG stocks, Google sports a $657 billion market cap. Over the past three years, it has pushed up 61% and has grown revenue by 17% a year.

Google -- or Alphabet, its parent company -- is the cash cow of the FANG stocks. It is sitting on $86 billion in cash and has very little debt.

If Google paid a dividend, it would get the green light from me.

But until then, we wait on the sides.

Playing Tech Properly
While I don’t recommend picking up shares of these four stocks, there are two other companies profiting from the tech craze that make much better investments... In fact, you sometimes see these companies grouped in with FANG, making the acronym FAANG or FAMG.

The two companies I am referring to are Apple (AAPL) and Microsoft (MSFT).

Over the past three years, Apple has returned 57% due to their dominance in the mobile phone market. IPhones are everywhere, and Apple has the market craving more with their updates and new releases.

Apple is sitting on $200 billion in cash overseas and is currently the largest company in the world. And if you're a loyal Daily Edge subscriber, you will know that I am predicting a huge cash windfall through a special tax holiday planned by President Trump.

Besides its 1.60% dividend, Apple is looking to grow further by grabbing a stake in the driverless car market and smart house revolution.

I recommend holding on tight to your shares!

Microsoft is another tech giant that pays a 2.15% dividend and has returned 66% over the past three years. We held Microsoft for a few years in Lifetime Income Report, but took a generous 44% return when it looked like a strong dollar would hamper international sales.

Microsoft is a great company with a reliable dividend if you want an additional company to cash in on the tech craze.

This article originally appeared on Daily Reckoning.

 

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