With nearly 11% annualized gains, equities have delivered extremely favorable returns over the past 10 years.1 More recently, those gains have been all about the FAANGs: Facebook, Apple, Amazon, Netflix, and Google – as the digital world reshapes various facets of our economy. This is not just a U.S. theme, but a global one. China, for example, has its own version of FAANG in Baidu, Alibaba, and Tencent, shortened to the acronym BATs. No matter the domicile, digital leaders have dynamically disrupted business on a global scale.

But alongside market exuberance and gains for these tech stocks have come continued high investor expectations. Current market capitalizations relative to underlying fundamentals for the FAANGs suggest the possibility that the group has experienced a disproportionate run-up in price relative to revenue.

Exhitbit 1: FAANG Revenues and Market Cap Show Hefty Premiums

What’s more, the latest quarter’s earnings season has brought rare differentiation to the FAANG group. Facebook plummeted nearly 20% on earnings a day after reporting slowing user growth and a disappointing outlook. On the other hand, Apple soared to a $1 trillion valuation on the back of a strong stock buyback program and the continued global dominance of its software lineup.

Considering a FAANG Alternative

This new earnings inconsistency among FAANG stocks gives investors the opportunity to reassess market leaders. We propose an acronym based on fundamentals. We favor revenue as a fundamental metric due to its stability and the difficulty in manipulating the top line relative to metrics further down the income statement, such as earnings. In this case, the top five revenue producers in the S&P 500 are Walmart, Apple, Berkshire Hathaway, UnitedHealth Group, and Amazon, or W-A-B-U-A. (In addition to being an acronym of revenue-based market leaders, Wabua is also a genus of spiders discovered in 2000 in Queensland, Australia.) While it remains to be seen whether WABUA stocks have the fangs to take a bite out of high-flying FAANG dominance, their outstanding top-line revenues may offer investors stability when valuations are stretched.

Exhitbit 2: WABUA Revenues and Market Cap Display Attractive Valuations

When CNBC analyst Jim Cramer and Realmoney.com’s Bob Lang concocted the FANG group in 2013, originally without Apple, they couldn’t have imagined the four stocks would earn a sizzling 691%, on average, over the next five plus years.2 A brilliant call indeed, but was there any fundamental anchor associated with the selection? Lang, a talented market technician, noted that these four securities had strong momentum signals, and he was right. However, as cracks have begun to emerge in the famed momentum trade, we can see that, in the words of Bob Dylan, “The Times They Are a-Changin’.”

One way to combat changing momentum and uncover opportunities is to keep a close watch on fundamentals and price in tandem. Analyzing free cash flow yield (FCF Yield), or the percentage of shareholder equity that companies earn in free cash, is one way to do this. Companies can use this free cash to pay immediate cash dividends or fund internal growth. Exhibit 3 shows how an equally weighted WABUA portfolio offers more than twice the FCF Yield of an equally weighted FAANG portfolio, potentially positioning the WABUA group to benefit as investor moves cause the momentum landscape to shift.

Exhitbit 3: WABUA More Than Doubles FAANG’s Free Cash Flow

Revenue-Weighting Anchors Exposure in Bedrock Fundamentals

Compounded earnings growth happens over the course of years, not days, but that doesn’t mean we can’t assess along the way. Given the enormous fundamental and share price growth the FAANG group has seen over the past few years, this may prove an opportune time to analyze the fundamentals of these companies alongside their market caps. For investors seeking a FAANG alternative, weighting portfolios by revenue rather than market cap grounds the equity portfolio in the fundamental bedrock of top-line sales, which could prove effective as valuations become increasingly stretched.

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  1. ^Morningstar, as of 8/31/18, measuring the S&P 500 Index
  2. ^Morningstar, measuring cumulative return for Facebook Inc A, Alphabet Inc A, Netflix Inc, and Amazon.com Inc from 2/6/2013 – 8/31/2018