The Watchman Letter: Investors who own the FANG Stocks will get Bitten

in #money6 years ago (edited)

The current Tech Stock rally proves that investors never learn. They have a herd mentality investing in stock because everyone else is investing and they are FOMO "afraid of missing out", regardless of price and future returns. I understand it is difficult to make analytical investment decisions, when the Financial Media always constantly up selling the Fang Stocks. The Fang Stocks are some the most widely held stocks and have large Market Caps.
FANG Stocks:

  1. Facebook $567 Billion Market Cap
    Stock Price $195.00
    P/E Ratio 32

  2. Amazon: $832 Billion Market Cap
    Stock Price $170.00,
    P/E 216

  3. NetFlix $170 Billion Market Cap
    Stock Price $391
    P/E 263

  4. Alphabet/Google
    $802 Billion Market Cap
    $1157.00
    P/E 49
    Are the FANG Stocks Overvalued? Lets Look at the Historical P/E 10

pe ratio fang stocks.jpg

The Green Band shows the normal stock price range 14.4 to 17.4. Below this price range is considered good price for a stock, and a stock above this price range is considered expensive. So lets look at the P/E ratios form lowest to highest of the FANG Stocks again.

  1. Facebook P/E 32
  2. Alphabet/Google P/E 49
  3. Amazon P/E 216
  4. NetFlix P/E 263
    The DotCom Boom P/E 10 Average was 44.2. Facebook is the only stock that has not breached the 44.2 level. All the FANG stocks are above the current 10 P/E Average of 31.4 which is considered historically expensive. The Financial Media will make economic justifications of why investors should buy these overpriced stocks.
    The P/E is a 10 year average. We will estimate the future earnings of these FANG Stocks at 50 % per year. After 10 years all of these stock increase earnings by approximately 1600%. 1600 divided by 100 equals 16 times earnings in 10 years.
    Now lets convert these P/E ratios by dividing 16 =10 years into the years before the multiples are reached.
  5. Facebook P/E 32 = 20 years
  6. Alphabet P/E 49 = 30.6 years
  7. Amazon P/E 216 = 135 years
  8. NetFlix P/E 263 = 164 years.
    The FANG stocks at these prices are no longer investments but pure speculation or a greater fool to buy your stock.
    If any major market correction of 20% to 40% occurs,
    then the FANG Investors will never see a return on their investment and under stand the true meaning of the FANG Stocks.

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