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Large Tech Looking Attractively Valued?

The FANG+ index is an equal weight index of the core FANG stocks – Meta (Facebook), Apple, Amazon, Netflix and Alphabet (Google) – plus another five actively traded technology growth stocks – Microsoft, Alibaba, Baidu, NVIDIA, and Tesla.

Nutshell Graph of FANG+ index

The above chart shows the spread between the estimated P/E ratio of the FANG+ index and the S&P500. The range over the last 4 years of the FANG+ premium has been 24.3 to 7.0. At the time of writing the current premium is 7.1. There has only been one day over this 995-day period where the Fang+ index has been cheaper as measured by this metric (3rd Jan 2019).

We believe that, given the quality growth potential of several of these names, they offer an attractive proposition, and the recent underperformance may be overdone.

The Nutshell Growth Fund holds Meta, Alphabet and Microsoft in our Top10. These currently have an average ROE of 37.4%, Profit Margin of 30.8%, and a free cashflow yield of 3.4%. These and other factors make them our preferred constituents. We believe these exceptional wide moat companies have pricing power and should perform well over the long run in any macro environment.

What about inflation and higher rates?

We can see from the chart that, during 2018, when US 10-year bond yields were at a local high of between 2.75%-3.25% the Fang+ traded at a rich premium to the market. Furthermore, in the four rate hiking periods since 1993, the S&P500 Index has gained an average of 2.5% in the 3 months prior to the Fed’s first rate hike and during these four rate hiking cycles Technology has performed very well with average annualized returns of over 20%. For these reasons we remain positive on our holdings going forward.

By Mark Ellis, CEO Nutshell Asset Management

10th January 2022

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