Should funds stick with the FAANGs after lockdown bounce? Amazon is the only attractive FAANG company at this stage, says Martin Currie’s Osmani
Amazon is the only FAANG stock offering attractive long-term investment potential and a more benign risk profile after investors bid up the remaining four companies to demanding prices, Zehrid Osmani of Legg Mason affiliate Martin Currie has said.
Osmani, who runs a variety of unconstrained, concentrated portfolios at Legg Mason affiliate Martin Currie, including the Legg Mason IF Martin Currie US Unconstrained Fund, said four of the famous five face a variety of threats which could constrain share prices going forward after the dramatic run higher they have collectively seen.
“The market has favoured these companies and they have been flavour of the month since the COVID pandemic erupted,” he said.
“The risk now is that these obvious beneficiaries of lockdown have been bid up a lot, and now it’s a question of what is in the price going forward.”
The only FAANG stock Osmani holds in the Legg Mason IF Martin Currie US Unconstrained Fund is Amazon, because it continues to offer attractive potential over the long term.
“Amazon is able to harness some very powerful long-term structural growth trends. The management has the ability to dominate various sectors, even whilst building scale and investing in their own business,” Osmani said.
“We are comfortable with the price level of this investment, and believe Amazon is the best placed out of the so-called FAANG stocks to grow at a sustainable level, whilst facing less risks.” In comparison, he says the other four names all face specific challenges.
“For Facebook we have reservations because as long-term investors, we simply don’t have the visibility on the regulatory threat to its platform, and we are concerned about it having a sensible business model which will enable it to grow its user base sustainably.
“Google is a similar story from a regulatory threat perspective as the company faces increased scrutiny, and we don’t want to expose our investors to such a low visibility event, given our inability to quantify the impact it could have on the company’s valuation.”
Osmani assesses every stock in his concentrated portfolios to assess the risks they face at an industry, company and ESG level, as well as assessing how they skew the risk of the overall portfolio.
He said both Apple and Netflix also faced risks which were not reflected in their elevated share prices.
“In terms of Apple, we’ve had a preference for Microsoft instead, and as we think there’s a potential for them to see their renowned pricing power come under threat for phones and tablets.
“Rivals like Samsung are a threat to them in their own market, and there is a risk of constant erosion of pricing power if competitors can make cheaper alternatives, especially if you consider the outlook for employment and wages globally now.”
Finally, Osmani said Netflix faces increasingly stiff competition from major rivals. “Netflix has been a clear favourite amid the COVID pandemic, for obvious reasons, as have many of the ‘stay at home’ stocks, but there is constant competitive pressure to keep investing in new content, which weighs down on returns potential.
“That dynamic, and the strength of the rivals in this space – be it Disney or indeed Amazon prime – means its returns could be impaired over the long-term.”
“The thing we have been pleased with in our portfolios is that our funds have been able to perform well despite having very little or no exposure to the strongly performing FAANGs, which in our view shows that we can find sources of alpha in a differentiated way.”