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

With the Federal Open Market Committee meeting approaching, analysts at Jefferies on May 3 advised investors to avoid the popular FAANG + Microsoft stock group.

They instead referred to a group they called MANG. We’ll compare the two groups below.

FAANG GROUP – Facebook Holding Company Meta Platforms Inc. FB,
+ 0.66%And
Apple Inc. AAPL,
+ 0.95%And
Amazon.com Inc. AMZN,
-0.34%And
Netflix Inc. NFLX,
-0.08%
and Google’s holding company, Alphabet Inc. GOOG,
+ 0.85%

Google,
+ 0.64%
– It has been known to investors for many years. Those companies and Microsoft Corp. MSFT,
-0.90%
They were at the forefront of a long rally in US tech stocks. As you can see below, all of them have fallen significantly this year, but the worst performers were Netflix and Meta.

On May 3, a team of analysts at Jefferies led by Sean Darby reiterated their February recommendation that investors stay away from FAANG + Microsoft because the expected rise in interest rates would be particularly difficult on “long-term assets.”

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

He prefers the MANG group – Microsoft, Apple, Nvidia Corp. NVDA,
-0.57%
and Alphabet – as a better basket for a price-rising environment, citing its “balance sheet, dividend yield and FCF”. [free cash flow] fruit.”

distance Two-day Federal Open Market Policy Committee meeting On May 3 and 4, the Federal Reserve is expected to do so 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 holdings of bonds. Anticipating this tightening, Darby also cautioned investors that “the main message is patience.”

MANG vs FAANG + MSFT

First, here’s some information about this year’s performance:

  • The FAANG + Microsoft group lost $1.4 trillion in market capitalization during April. You can see a breakdown of the individual depreciation here. This was a 15% drop in just one month. The group’s market capitalization fell by $2.21 trillion, or 22%, in the first four months of 2022.

  • The MANG group’s market capitalization fell by 14% during April and 18% for the first four months of the year.

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Darby cited balance sheets, dividend yields and free cash flow returns to support his preference for the MANG group over the FAANG + Microsoft group. This means that the single group 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 groups.

Debt Returns, Earnings and Free Cash Flow Returns

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

company

ribbon

Long-term debt/equity

Return on EPS forward

FCF forward return

forward P/E.

Price change – 2002 until 2 May

Microsoft Corporation.

MSFT,
-0.90%

20%

3.71%

3.50%

27.0

-15th%

Apple company

AAPL,
+ 0.95%

123%

4.03%

4.37%

24.8

-11%

Nvidia Corporation.

NVDA,
-0.57%

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,
+ 0.66%

6%

5.99%

4.38%

16.7

-37%

Amazon.com Inc.

AMZN,
-0.34%

101%

1.33%

1.29%

75.3

-25%

Netflix Inc.

NFLX,
-0.08%

173%

5.68%

1.36%

17.6

-67%

Source: FactSet

Click the indicators to learn more about each company.

click here Get Tomi Kilgore’s step-by-step guide to his wealth of information for free on the MarketWatch Quotes page.

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

The numbers clearly favor the MANG group for free cash flow returns. Meta Platforms is an exception, with the lowest debt-to-equity level, highest estimated return on earnings and second highest estimated return for FCF (after Alphabet). It also has the lowest futures price-earnings ratio of the group, after a 37% drop in its share price this year.

Looking to the future

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

company

Estimated Sales (Million Dollars) – 2022

Estimated Sales (Million Dollars) – 2023

Estimated Sales (Million Dollars) – 2024

Expected compound annual growth rate for sales for two years

Microsoft Corporation.

$213,388

$242,622

272850 dollars

13.1%

Apple company

$399,580

420,378 dollars

$440,949

5.0%

Nvidia Corporation.

34206 dollars

$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

$71,952

16.3%

Netflix Inc.

$32491

35,527 dollars

39,168 dollars

9.8%

Source: FactSet

company

Estimated EPS – 2022

Estimated EPS – 2023

Estimated EPS – 2024

2-year EPS compound annual growth rate

Microsoft Corporation.

$10.06

USD 11.71

US $13.48

15.8%

Apple company

6.23 dollars

6.63 dollars

7.10 USD

6.8%

Nvidia Corporation.

$5.56

$6.59

$7.57

16.8%

Alphabet Inc Class C

USD 112.38

USD 133.96

153.66 USD

16.9%

Meta Platforms Inc. Class A

$11.90

14.09 USD

USD 16.21

16.7%

Amazon.com Inc.

$21.56

$55.75

$89.44

103.7%

Netflix Inc.

10.94 USD

USD 12.09

USD 14.66

15.8%

Source: FactSet

company

FCF estimated per share – 2022

Estimated FCF per share – 2023

Estimated FCF per share – 2024

FCF compound annual growth rate for 2 years

Microsoft Corporation.

$9.48

USD 11.14

Unavailable

Unavailable

Apple company

$6.75

$7.32

8.07 dollars

9.3%

Nvidia Corporation.

$4.90

6.65 dollars

$6.70

16.9%

Alphabet Inc Class C

USD 118.40

USD 144.06

$168.20

19.2%

Meta Platforms Inc. Class A

8.41 dollars

$10.88

USD 15.46

35.6%

Amazon.com Inc.

$15.11

USD 65.48

USD 131.66

195.2%

Netflix Inc.

$1.69

$4.73

$7.81

114.9%

Source: FactSet

No consensus estimate is available for Microsoft’s free cash flow for 2024. Analysts expect the company’s FCF per share to increase by 18% in 2023.

What is striking about the compound annual growth rate estimates is that analysts expect very large increases in free cash flow for Amazon and Netflix, through 2024.

So when is it time to go back to the less-favorite Meta, Amazon, and Netflix?

Darby wrote:[W]e The slowdown in the economy at the moment has stuck enough to consider acquiring 10-year Treasury stock agents,” which includes FAANG + Microsoft group. He believes it is premature, and therefore continues to favor the MANG group for a bullish rate environment.

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