FAANG Stocks: Defanged or Just a Toothache? - Part I

If there ever was a perfect example of a bright, shiny object, it's the fabulous five known as the FAANG stocks - Facebook Inc. (Nasdaq: FB), Apple Inc. (Nasdaq: AAPL), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX), and the "new Google": Alphabet Inc. (Nasdaq: GOOG).

Together, they comprise around 38% of the Invesco QQQ Trust, the tracking ETF for the Nasdaq 100.

No stocks receive more attention than FAANG stocks, especially around earnings time.

And with good reason. Their numbers are hotly anticipated and typically produce huge price swings (some might call them "overreactions") that have market pundits racing to see who can interpret the results first.

I prefer to let the dust settle a bit. Now that all FAANGS except Apple have reported (as I write this) and the initial reactions are out of the way, I'm using my Best in Breed system to analyze each to see where these stocks are headed.

There's no money to be made rehashing what happened and why. We're more interested in where these stocks are going and how we can profit.

Today, realizing that Apple is still a wild card, I want to look at the best (Amazon) and worst (Facebook) of the lot. Later this week, I'll analyze the remaining three. And, as usual, I'll give you some trade ideas to leverage my analysis.

Let's get started with the Best in Breed (so far): Amazon.

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Amazon: the Beast That Can't Be Tamed

Last Thursday, the company reported that revenue soared 39% from a year ago while earnings increased 12-fold and more than doubled analyst expectations. It really is an unstoppable beast.

The reaction to the earnings blowout, however, was muted. While the stock hit a record high on Friday, it closed up just a fraction of a percent, far below the average post-earnings move of around 6%.

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And the shares have been slumping a bit this week, as well.

But let's get real. The shares are down around 1.4% since reporting, which is a blip on the chart. The stock is hanging on to its 20-day moving average, while the 50-day moving average sits less than 4% below to add a second layer of support.

What's more, the stock isn't close to being overbought, as shown in the relative strength indicator chart below. In fact, it has a neutral reading right around 50. So much for being overheated.

Amazon Stock

With another blowout quarter in the books and the technicals pointing higher, Amazon is unquestionably the Best in Breed. It's been beating up on the rest of the Nasdaq 100 all year, and there's no reason to think the outperformance won't continue.

amazon vs qqq

Facebook: Weighed Down by Its Image Problem

Facebook, on the other hand, is a totally different story.

We all know by now that the company lost $120 billion in one day thanks to a revenue miss and slowing user growth. But unlike Amazon, the stock was overheated heading into earnings, despite some disturbing allegations concerning privacy and fake accounts.

Let's face it, Facebook's biggest issue right now is its image. Being hauled in front of Congressional committees is not good for the stock price. Slowing user growth and a revenue shortfall don't help, either. Yet the stock went on an astonishing run-up of 47% in just four months heading into earnings.

Something had to give... and it did.

Often after a huge post-earnings move, we'll see a reversal as the market absorbs the news and gets past the initial shock. But we're not seeing that with Facebook. The stock continued to drop in the two days following the initial plunge and is only fractionally higher today.

And with news coming out today that Facebook deleted accounts related to election fraud, the stock is well off its daily high.

Facebook Stock

Another concern is the overwhelmingly positive view of Facebook held by analysts. A whopping 41 of 44 covering analysts rate the stock a "Buy" or better, leaving little room for upgrades - but a whole lot of room on the downside.

With the stock struggling to recover from its earnings debacle and the news not getting any better, it's more than likely we'll start to see some downgrades coming FB's way.

Just to rub it in a little more, here's a relative strength chart of Amazon versus Facebook for 2018.

After the initial outperformance, Amazon held its own while Facebook went on its monster run. And of course, the post-earnings spike is no surprise.

The bottom line is that it's no surprise that Amazon is the better stock. Heck, it was a Best in Breed stock before earnings. And it's Best in Breed now.

So what to do going forward? I'd go long Amazon and short Facebook. If they both go up, I believe Amazon will outperform. If they both go down, Facebook should underperform.

If you want to limit your capital exposure, look at Amazon calls and Facebook puts in the September monthly series (expires Sept. 21).

And stay tuned for part II as I continue to take a close look at the remaining FAANG stocks to determine whether the fabulous five just have a toothache or if they've truly been defanged...

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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