Tom Lee: History Says FANG Stocks Are a Better Short Than Long in 2016

The exalted shall be humbled.

Indian Prime Minister Narendra Modi Meets With Facebook Inc. Chief Executive Officer Mark Zuckerberg
Photographer: David Paul Morris/Bloomberg

In 2016, owning FANG stocks is likely to bite investors in the proverbial rear end, according to Fundstrat Managing Partner Tom Lee.

Or, as the strategist puts it, "FANG likely ends with a DANG! (#$%^!!#) in 2016."

As of Thursday's close, 2015's core FANG holdings—Facebook, Amazon, Netflix, and Google (Alphabet)—are up an average of 86 percent year-to-date. Without the stellar performance of these names, the S&P 500 wouldn't be struggling to tread water in 2015—it'd be drowning: 

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But it generally doesn't pay to double down on last year's winners, Lee reminds us.

"Owning FANG into 2016 implies a historical -290 basis point underperformance and a 52 percent chance of underperforming," he cautions, based on the propensity for the top 10 best-performing stocks in the S&P 500 to offer a below-average return in the following year. "Frankly, history says it is better to short FANG into 2016."

Fundstrat

Lee sees FANG stocks lagging the market as part of a broader shift from growth stocks to more value-oriented names, that is, relatively inexpensive companies with solid balance sheets that lack the eye-popping top-line growth of the aforementioned foursome. 

"We see this as further evidence of the growth regime’s strength during 2015, but as we have written in previous reports, we see a regime shift to value," he wrote. "Value has not outperformed since 2012 but should be a key beneficiary of fading dollar strength."

The strategist joins analysts at Jefferies in doubting that the FANG stocks can extend their run of form.

Lee highlights some of 2016's potential FANGs (whose names, sadly, do not lend themselves as well to catchy acronyms), drawing on some of this year's biggest losers. The list includes: National Oilwell Varco Inc., Caterpillar Inc., International Business Machines Corp., HP Inc., ConocoPhillips, The Procter & Gamble Co., Chevron Corp., Exxon Mobil Corp., and Wal-Mart Stores Inc.

However, Lee does outline a scenario in which this king quartet could also beat the field in 2016, which he calls the "Double-FANG" risk.

"The greatest risk to our thesis is that investor risk aversion amplifies the further push into momentum and growth stocks in 2016," he concludes. "The scenario here would be Fed move triggers panic and therefore markets remain this bifurcated."

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