The key role of four companies from the title of this article (Facebook, Apple, Netflix, Google) starts to resemble situation from the end of the '60s and beginning of the ‘70s. This is when American market was stormed by fashionable firms like Nifty Fifty. Investors were convinced about the limitless potential of several companies and it led to very painful crashes. How will the history end this time?

Nifty Fifty

At the turn of the ‘60s and ‘70s, American stock exchange received a lot of attention with investment funds being on the rise. With the money from investors they were buying promising companies with solid fundamentals. This group among others consisted of industrial leaders, healthcare and even high-tech firms. Soon these companies got themselves a nickname - ‘Nifty Fifty’.

The key element of the Wall Street fashion was the belief in great perspectives. A decision to buy Kodak, Polaroid or Upjohn Company was motivated by a motto of ‘buy and hold forever’. Choosing amazing company’s stock should give profits over the incoming decades and not only years or months. 

If a stock is ‘doomed' for eternal growth then no price is too high. The result was radical overpricing and the first Nifty Fifty peak was in 1969, second in 1972/73. In the latter P/E for the most popular companies reached respective numbers: Polaroid – 95, McDonald’s – 86, Walt Disney – 82, Digital Equipment – 56, Eastman Kodak – 44. On many occasions, investors could not count on living long enough only to receive the amount they invested but no one seemed to care.

Very good summary of this situation is a chart below. It shows the scale of the overpricing of American stocks relative to the rest of the world. Clearly, the highest levels were reached during 1969 but also pay attention where are we today!

Source: www.zerohedge.com

In the beginning of 1969, the reality checked the prices of McDonald’s, Walt Disney and others and made it obvious that all these hopefuls will not rise until kingdom comes. Below you can see the size of the collapse (CPI adjusted).

Source: Marc Faber

Since the burst of a bubble in 1969, the market lost 66% with another bottom in 1982. Stock prices were going down for over a decade. Far from any surprise, Nifty Fifty were on sale. Polaroid, Avon, Xerox lost 91%, 86% and 71% respectively. Many of those bearing the nickname never returned to their previously privileged position (Sears, Kresge, JC Penney). There were those who end up bankrupt (Polaroid, Eastman Kodak).

Facebook, Amazon, Netflix, Google

Why we talk about Nifty Fifty today? First and foremost the shared belief of companies doomed to succeed and their infinite potential for growth. Looking back at the '60s and ‘70s we see that the number of favoured companies is ten times lower. Four companies – FANG – are responsible for 90% of S&P 500 capitalisation since 2015.

Since 2015 FANG added 630 billion USD while the rest of S&P 500 added only 45 bn USD. We can say that the growth of this index is based on the popularity of few companies.

Similar to fashionable Nifty Fifty also FANG had to reach extreme heights of P/E. Netflix reached 318, Amazon 178, Facebook 46 and Google 29. This is dramatically different than the market itself – 21.2 – which itself is a bubble level. During last 12 months, we had 204 instances when insiders (management, board of directors, people with high-level access) sold their stocks and NONE purchase transactions.

Apart from the acronym companies there is also Tesla. The corporation which only bleeds money while trying to overestimate their income. Soon Tesla will have to compete with huge competitors like Volkswagen or Toyota and this only raises questions about today’s price of Tesla.

Maybe some critics will say that comparison between FANG and Nifty Fifty does not make any sense and this case is rather about popular stocks regularly falling from grace. An example of GoPro fits here as many were hopeful for this fashionable company.

Of course, individual cases such as GoPro are completely normal but when we see only a few overpriced stocks being the main engine of the market – this is showing very weak fundamentals of the market.

Summary

The psychology of the crowd is a major factor in both examples of Nifty Fifty and FANG. Good performance of some equities make investors interested and ensuring voices of ‘experts’ only add to this hype. Soon in the environment like this prices are disconnected from essential data.

How to diagnose if we are seeing maniacal buying spree? Again, we go back to basics – P/E, CAPE, P/S – they are entry level tools easy to obtain. Another red flag is overly optimistic forecasts of ‘experts’, as one of Forbes authors wrote about FANG, to paraphrase “why should we care about the environment and the market where other companies are losing money if our price is going up?”

Information about FANG in this article exposes S&P 500 being evidently dependable on few very popular stocks. Central banks have their part in all this as the SNB put billions in Facebook, Google and other huge corporations. Investors should now either join the crowd, hope for these gains to continue forever or look for undervalued assets. We still believe that miners, commodities and Russian and Chilean equities are far more attractive.

During mania everything is ok until the red colour enters the room with catastrophic results. When investors start questioning limitless growth small drop is due. Tense atmosphere makes everyone ask themselves – who will leave next? When the panic starts there are a lot of sellers and a deficit of buyers. The Nifty Fifty history shows that 90% sale is possible. Unaware investors have to realise that in order to compensate for such loss price must jump up by 1000%.

 

Independent Trader Team