The hot FANG stocks are not likely to continue their strong outperformance in 2018, and investors should look to overweight other technology names and value stocks, according to FundStrat.
FundStrat founder Tom Lee says the group could be challenged by the Federal Communication Commission's decision this week to do away with Obama-era net neutrality rules that guaranteed content providers equal access to the internet. Simply put, the rules prevented internet providers from charging content companies more for a higher level of service.
"While the implications are not yet known, we see this as creating the potential for content distributors to bear a greater share of the total cost of the internet," wrote Lee. FundStrat estimates the cost of the internet to be about $100 billion a year, and the winners would be telecom and cable companies that could find ways to share their costs.
"...There would be a significant topline offset, if 5 to 10 percent of those costs are shifted," he noted.
Lee also points to a curious case to be made for FANG, based on its history of disappointing in 'even' years. "Since 2006, $100 invested in FANG in odd years would have turned to $1,487 [15X] and $100 in even years would have fallen to $70," or down 30 percent, he wrote.
"The upside to Net Neutrality, in the context of FANG, is that they manage to raise prices to offset potential need to make 'balance of traffic' payments to cable/telecoms. For instance, Netflix which plans to raise prices, likely has an inelastic demand curve and could raise prices on its customers again," he wrote.
Lee said there is a risk to his call to buy other technology stocks, in that the market may decide tech does not fall into the value category. Lee said, however, that the outlook for tech over the next decade is strong, especially given the shortage of labor. Tech has outperformed in other periods of structural labor shortages, like 1948 to 1967, and again in the 1990s.
FANG should end 2017 with a bang. Lee said strong seasonals favor stocks into year end and FANG could continue to outperform during that period.
He notes tech was a big contributor to the S&P 500's more than 18 percent gain for 2017. But FANG was even bigger, up 58 percent versus the overall technology sector gain of 36 percent.