Investors cannot get enough of the FANG stocks because of growth. Unfortunately, the FANGs are expensive and pay no dividends.
Fortunately, a FANG alternative exists in the form of the NAMPOF. The NAMPOF is a list of FANG alternatives I put together.
The FANG comprises Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and Google (NASDAQ: GOOG). Google is the old name for Alphabet (NASDAQ: GOOGL). The FANG is a list of high-growth technology companies that can generate a lot of cash.
The NAMPOF includes; NVIDIA (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), PayPal (NASDAQ: PYPL), Oracle (NYSE: ORCL), and Facebook (NASDAQ: FB). I envisioned the NAMPOF as a group of cheaper, growing, and cash rich companies. For the sake of income I included dividend stocks.
What is wrong with the FANG Stocks?
The FANG stocks have several problems. They are expensive; Amazon was trading at $1,914.54 a share on 24 August 2018. Alphabet was trading at $1,214.95 on the same day.
In contrast, Apple was trading at $215.94, NVIDIA at $269.94, Microsoft at $108.05, PayPal at $89.40, Oracle at $49.20, and Facebook at $174.22 on the same day. Therefore, it was possible to invest in multiple shares of the NAMPOF companies for less than the price of one unit of Alphabet.
Worse, none of the FANGs pays a dividend. Therefore, they are not income stocks.
One FANG, Netflix has just barely made money. Netflix reported a quarterly net income of $40.76 million as recent as 2nd Quarter 2016.
Worse, Netflix reported a free cash flow margin of -14.76%, a negative free cash flow of -$558.11 million, and an operating free cash flow of $518.24 million on June 30, 2018.
Disturbingly, the only “positive cash flow” Netflix reported on that day was $1.909 billion from financing. Translation, Netflix borrowed $1.909 billion to keep itself going. We need to place a serious question mark next to the $384.35 million in net income, Netflix reported on 30 June 2018.
Tellingly, Netflix was trading at $350.10 on August 24, 2018. You could have purchased seven shares of Oracle for that price on that day.
Are the NAMPOF stocks better than the FANG Stocks?
The NAMPOF stocks have several advantages over the FANG. I describe those advantages below:
NVIDIA (NASDAQ: NVDA) — The chipmaker is cash rich and has experienced significant growth in recent years. Annual revenues exploded from $5.101 billion in 2016 to $9.714 billion in 2017. NVIDIA reported $7.108 billion in cash and equivalents on 29 July 2018, up from $5.8777 billion in July 2017.
NVIDIA has paid a dividend for 14 years, and racked up five straight years of dividend growth. NVIDIA shareholders enjoyed a 0.25% dividend yield, a 60¢ annualized return, and a payout ratio of 8.5% on 17 August 2018. The next NVIDIA dividend is 15¢ scheduled payment on 21 September 2018.
Apple (NASDAQ: AMZN) — What is not to like about this stock? Apple reported $31.971 billion in cash and equivalents, and $78.97 billion in cash and short-term investments on 30 June 2018.
Apple achieved a free cash flow of $11.221 billion, an operating cash flow of $14.448 billion, an investing cash flow of $3.947 billion, a gross profit of $20.421 billion, an operating income of $12.612 billion, and a net income of $11.519 billion on June 30, 2018. Apple has become a house of cash, which is why Warren Buffett has learned to love it.
Apple might be the best dividend stock around. Apple shareholders received a 73¢ dividend payout on 16 August 2018. Apple offers five years of dividend growth, a dividend yield of 1.34%, an annualized payout of $2.92, and a payout rate of 25%.
Microsoft (NASDAQ: MSF) — The software giant generates vast amount of cash and pays a good dividend. Microsoft reported a free cash flow $7.438 billion and an operating cash flow of $11.418 billion on June 30, 2018.
Impressively, Microsoft reported a gross profit of $20.343 billion, an operating income of $10.379 billion, and a net income of $8.873 billion for 2nd Quarter 2018. Best of all, Microsoft reported $133.758 billion in cash and equivalents on June 30, 2018.
Microsoft has racked up 14 years of dividend growth. Microsoft shareholders enjoyed a dividend yield of 1.56%, an annualized payout of $1.68, and a payout ratio of 39.5% on 16 August 2018. It will pay a 42¢ dividend on September 13, 2018.
PayPal (NASDAQ: PYPL) — I like PayPal because it is both a technology and a finance stock. PayPal is growing fast, and it generates a lot of cash.
PayPal reported annual revenues of $13.094 billion for 2017 and $10.842 billion for 2016. PayPal reported a gross profit of $1.804 billion, an operating income of $572 billion, and a net income of $526 billion for 2nd Quarter 2018.
Tellingly, there are bad signs at PayPal including a negative free cash flow of -$170 million and an operating cash flow of $28 million for 2nd Quarter 2018. Conversely, good signs at PayPal include $13.638 billion in cash and short-term investments on June 30, 2018.
PayPal pays no dividend but it is growing fast in a lucrative segment. PayPal was cheap, trading at $85.45 on 17 August 2018.
Oracle (NYSE: ORCL) — Oracle is a cheap but cash-rich company that pays a respectable dividend. Oracle shares were trading at $48.36 on 17 August 2018.
Oracle makes a lot of money and generates a lot of cash. It reported a gross profit of $9.073 billion, an operating income of $4.380 billion, and a net income of $3.407 billion on May 30, 2018.
Oracle achieved an operating cash flow of $4.66 billion, an investing cash flow of $3.16 billion, and a free flow of $4.282 for 2nd Quarter 2018. Oracle reported $21.620 billion in cash and equivalents, and $67.261 billion in cash and short-term investments on May 31, 2018.
Oracle offers shareholders six years of dividend growth, a dividend yield of 1.57%; an annualized payout of 76¢, and a payout ratio of 24.9% on 17 August 2018. The last Oracle dividend was 19¢ paid on 31 July 2018.
Facebook (NASDAQ: FB) — I like Facebook because of the vast size of its platform and all the cash it generates. Those attributes make up for the lack of a dividend in my mind.
Facebook reported a gross profit of $11.017 billion, an operating income of $5.863 billion, and a net income of $5.106 billion for 2nd Quarter 2018. Facebook achieved a free cash flow of $2.838 billion and an operating cash flow of $6.298 billion.
Best of all Facebook reported $42.309 billion in cash and short-term investments and $11.552 billion in cash and equivalents on June 30, 2018. Facebook is a great stock because of its ability to generate lot of cash.
FANG Stocks for Value Investors
You can think the NAMPOF of as a FANG for value investors. Holdings in NAMPOF are more diversified than FANG and some of them generate dividend income.
It diversifies NAMPOF because NVIDIA and Apple are hardware makers and PayPal is in finance. FANG scares me because it is almost all software based. Something I dislike about FANG is the lack of a financial stock.
Containing six stocks further diversifies. Four NAMPOF stocks; Apple, NVIDIA, Oracle, and Microsoft, are proven moneymakers.
I consider PayPal and Facebook speculative because they base their businesses on growth. However, both companies have showed the capability to generate vast amounts of cash.
I designed the NAMPOF to offer a little more than safety and income than FANG at a comparable rate of growth.
Please note: I intended this commentary as food for thought. Not investment advice.
This story first appeared at Market Mad House your barometer for equity insanity and value investing.