Goldman Sachs Takes A Swing At FANG By Offering New Acronym FAAMG, Cautions Momo Trade Becoming Crowded

Goldman says the acronym FANG has morphed into FAAMG which includes Facebook (NASDAQ: FB), Amazon.com (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOGL). These are the names that have dominated the S&P and Nasdaq indices when it comes to outperformance.

Analyst Rob Boroujerdi says "[t]his outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives."

He says that these stocks could draw some incremental flows citing the viewpoint of investors that FAAMG stocks have been treated much like Staples due to negative correlations to interest rates and low realized volatility. He comments that 6-month realized volatility for FAAMG has fallen over the past year and currently rests "not only below that of the average stock in the S&P 500 but is also below the average Consumer Staples & Utilities stock ignoring any potential cyclical, regulatory, or tech disruption risk."

Boroujerdi notes that while Netflix (NASDAQ: NFLX) and NVIDIA (NASDAQ: NVDA) are often included in the acronym "they are not large enough to have a significant impact on the SPX" and therefore should be omitted. Below is a chart of the increasing impact these five tech stocks have had on both the S&P and Nasdaq index performance:

He cautions that the recent rise in Momentum factor investing has built a "valuation air pocket" underneath these stocks leading to a cause for pause which means should something cause a drop in valuations there will be a run for the fire exits which will likely crash these names due to their over-popularity among investors. He says Momentum is becoming crowded relative to history.

Free Cash Flow for tech stocks remains robust although it is beginning to plateau when using the Technology Select Sector Spdr Fund (NYSE: XLK) proxy:

So where does this leave us? Well positioning is now extreme in the names as noted in the opening paragraph and should growth slow or fall out of favor there will likely be a rush to exits and we'll most likely see a collapse in these valuations given historical performance should the factor valuations continue to become more stretched versus historical levels.

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