With interest rates rising, it’s time to focus on MANG stocks instead of FAANG, says Jefferies

Ahead of the Federal Open Market Committee policy meeting, analysts at Jefferies on May 3 advised investors to steer clear of popular stock group FAANG + Microsoft.

Instead, they singled out a group they named MANG. We will compare the two groups below.

FAANG Group — holding Facebook Meta Platforms Inc. FB,
+0.67%,
Apple Inc.AAPL,
+0.80%,
Amazon.com Inc. AMZN,
-0.37%,
Netflix Inc. NFLX,
+0.20%
and holding company Google Alphabet Inc. GOOG,
+0.70%

GOOGL,
+0.56%
— has been well known to investors for many years. These companies and Microsoft Corp. MSFT,
-0.94%
were at the forefront of the long bull cycle in US tech stocks. As you can see below, all are down significantly this year, but the worst performers were Netflix and Meta.

On May 3, a team of Jefferies analysts led by Sean Darby reiterated its February recommendation that investors steer clear of the FAANG + Microsoft group because the expected rise in interest rates would be particularly difficult for “long-term assets”. duration”.

Darby wrote that FAANG + Microsoft “is not a homogeneous group” and repeated his recommendation for the MANG group.

He prefers the MANG group — Microsoft, Apple, Nvidia Corp. NVDA,
-0.45%
and Alphabet – as a better basket for a rising rate environment, citing “their balance sheet, earnings yield and FCF [free cash flow] yield.”

Following the Federal Open Market Committee’s two-day policy meeting on May 3-4, the Federal Reserve is expected to raise the federal funds rate by 50 basis points to a range of 0.75% to 1.25% and announce a plan to reduce its bond holdings. Anticipating this tightening, Darby also warned investors that “the key message is patience.”

MANG vs. FAANG + MSFT

First, here’s some info on this year’s performance:

  • FAANG + Microsoft Group lost $1.4 trillion in market value in April. You can see a breakdown of the individual impairments here. That was a 15% drop in just one month. The group’s market value is down $2.21 trillion, or 22%, for the first four months of 2022.

  • MANG Group’s market value fell 14% in April and 18% in the first four months of the year.

Darby cited balance sheets, earnings yields and free cash flow yields supporting his preference for MANG Group over FAANG + Microsoft Group. That means the odd bunch is Meta Platforms, Amazon, and Netflix.

So let’s look at two sets of numbers and estimates to compare the groups, listing the MANG names first, then the other three.

Debt, Earnings Yields and Free Cash Flow Yields

For comparison, here are the latest available long-term debt to equity ratios for the group, along with earnings and free cash flow yields based on current share prices and consensus estimates for the 12 coming months, and price/earnings ratios.

Company Teleprinter Long-term debt/equity Forward EPS return Yield of forward FCF PER before Price Change – 2002 to May 2

Microsoft Corp.

MSFT,
-0.94%

20%

3.71%

3.50%

27.0

-15%

Apple Inc.

AAPL,
+0.80%

123%

4.03%

4.37%

24.8

-11%

Nvidia Corp.

NVDA,
-0.45%

30%

3.03%

2.81%

33.0

-34%

Alphabet Inc. Class C

7%

5.11%

5.42%

19.6

-19%

Meta Platforms Inc. Class A

fb,
+0.67%

6%

5.99%

4.38%

16.7

-37%

Amazon.com Inc.

AMZN,
-0.37%

101%

1.33%

1.29%

75.3

-25%

Netflix Inc.

NFLX,
+0.20%

173%

5.68%

1.36%

17.6

-67%

Source: FactSet

Click on the tickers to learn more about each company.

Click here for Tomi Kilgore’s detailed guide to the wealth of free information on the MarketWatch quote page.

Darby favors MANG Group in part for the strength of its balance sheet, but Apple has a high long-term debt-to-equity ratio.

The numbers clearly favor MANG Group for free cash flow returns. Meta Platforms is the exception, with the lowest leverage, highest estimated earnings yield, and second highest estimated FCF yield (after Alphabet). It also has the lowest forward price-to-earnings ratio in the group, after its share price fell 37% this year.

look further

Here are the estimated compound annual growth rates (CAGR) for the next two calendar years for sales, earnings per share and free cash flow:

Company

Estimated sales ($M) – 2022 Estimated sales ($M) – 2023 Estimated sales ($millions) – 2024 Two-Year Forecast Sales CAGR

Microsoft Corp.

$213,388

$242,622

$272,850

13.1%

Apple Inc.

$399,580

$420,378

$440,949

5.0%

Nvidia Corp.

$34,206

$40,111

$44,829

14.5%

Alphabet Inc. Class C

$298,939

$344,603

$395,114

15.0%

Meta Platforms Inc. Class A

$127,545

$148,154

$169,668

15.3%

Amazon.com Inc.

$528,437

$618,272

$714,952

16.3%

Netflix Inc.

$32,491

$35,527

$39,168

9.8%

Source: FactSet

Company

Estimated EPS – 2022 Estimated EPS – 2023 Estimated EPS – 2024 2-year expected EPS CAGR

Microsoft Corp.

$10.06

$11.71

$13.48

15.8%

Apple Inc.

$6.23

$6.63

$7.10

6.8%

Nvidia Corp.

$5.56

$6.59

$7.57

16.8%

Alphabet Inc. Class C

$112.38

$133.96

$153.66

16.9%

Meta Platforms Inc. Class A

$11.90

$14.09

$16.21

16.7%

Amazon.com Inc.

$21.56

$55.75

$89.44

103.7%

Netflix Inc.

$10.94

$12.09

$14.66

15.8%

Source: FactSet

Company

Estimated FCF per share – 2022 Estimated FCF per share – 2023 Estimated FCF per share – 2024 CAGR FCF expected over two years

Microsoft Corp.

$9.48

$11.14

N / A

N / A

Apple Inc.

$6.75

$7.32

$8.07

9.3%

Nvidia Corp.

$4.90

$6.65

$6.70

16.9%

Alphabet Inc. Class C

$118.40

$144.06

$168.20

19.2%

Meta Platforms Inc. Class A

$8.41

$10.88

$15.46

35.6%

Amazon.com Inc.

$15.11

$65.48

$131.66

195.2%

Netflix Inc.

$1.69

$4.73

$7.81

114.9%

Source: FactSet

A consensus estimate of free cash flow is not available for Microsoft for 2024. Analysts expect the company’s FCF per share to increase 18% in 2023.

What is striking about the CAGR estimates is that analysts expect very large free cash flow increases for Amazon and Netflix, through 2024.

So when might it be time to return to the less favored Meta, Amazon and Netflix?

Darby wrote: “[W]We are currently waiting for the economy to slow enough to consider acquiring 10-year Treasury stock proxies,” which include FAANG + Microsoft Group. He believes it is too early and therefore continues to favor MANG Group for the rising rate environment.

Don’t miss: These stocks soared during the pandemic and then crashed. Ten should now double in price.

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