Appreciating Acronyms: Why the FANG Phenomenon Has Teeth

By Steven Russolillo in Hong Kong and Ben Eisen in New York Features Dow Jones Newswires

Finance professor Lily Fang is known in the academic community for her research into the perils of investing in stocks with lots of media hype.

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Even so, when she saw a barrage of attention paid to a tech-stock acronym that matched her surname, she couldn't resist.

"I figured I had to own these stocks," Ms. Fang, who teaches at France's Insead business school, said of the popular quartet of Facebook Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc.'s Google. "I mean, it's my last name, so why not?"

The FANGs are among the market's leaders this year. Though they have collectively lost nearly $52 billion in market value in September--their worst month since June and just the second down month this year, the rout isn't deterring FANG fans.

Investors will soon have a new way to bet on the buzzy investing phenomenon. Intercontinental Exchange Inc., the parent of the New York Stock Exchange on Tuesday unveiled an NYSE FANG+ Index, made up of the four stocks and a few other tech highfliers. It plans to launch a new futures contract based on the index in November, subject to regulatory review.

In a financial world full of jargon and acronyms, from ROE to ETF, FANG's teeth seem to have sunk in far beyond Wall Street. The term--more Dracula than dividend--has resonated with retirees, millennials, analysts and market pundits.

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And these tech companies have scorching stock prices that account for more than 12% of the S&P 500's gains this year through Monday, even after the recent selloff.

Stock-focused hedge funds are having their best year since 2009, due in part to outsize positions in FANG stocks. An investor who bought all four FANG stocks two years ago would be sitting on a 69% profit today.

The other FANGmania factor is how deeply entrenched these companies have become in people's lives.

Harold Katzman, a 78-year old retired ophthalmologist in Los Angeles, has a Netflix account and uses Facebook regularly. Last year, he trimmed his holdings of dividend-paying stocks like Procter & Gamble Co. and General Mills Inc. to make room for the FANGs, which he considers more exciting.

"I'm not the kind of guy to put all my money on red in Vegas and see what happens, but in retrospect, I wish I had put more into FANGs," Mr. Katzman said. "Technology is going to be the saving grace for the U.S."

Internet search traffic for "FANG stocks" on Google has been elevated for months. International Investment, an online newsletter for financial professionals, added FANG to its compendium of investment acronyms in June.

"I think FANG will define our generation," said Ross Gerber, president and chief executive of Gerber Kawasaki Wealth & Investment Management in Santa Monica, Calif. "These are the companies that, well, if you're not involved in them, you're not really an investor." All four FANG stocks are prominent in the portfolio of Mr. Gerber, whose firm has $645 million under management.

FANG was created as a humorous way to describe how investors were interested in just a handful of stocks, according to Jim Cramer, the television personality who claims to have coined the term a few years ago.

In 2015, Google reorganized into a holding company called Alphabet, effectively turning the "G" into an "A." Mr. Cramer said he emailed Ruth Porat, the company's chief financial officer, to tell her she had ruined FANG. He said he didn't hear back. Ms. Porat said she has no recollection of the event.

Over time, the FANG acronym stuck around. In June of this year, Christopher Girbes-Pierce, a Santa Monica, Calif.-based financial adviser, said he was at a birthday party attended by people who didn't have jobs in finance when someone brought up FANG.

"It sparked a whole conversation," he said, adding that among other things, people were excited about Amazon's acquisition of Whole Foods.

But not everyone is on the FANG wagon.

All the hype is a bit much for Joe Krier, a financial planner in Jacksonville, Fla. He says the euphoria around FANG is the "same way investors looked at dot-com stocks back in 1999."

Acronyms and their related investment concepts have a rich history. In the 1960s and 1970s, the Nifty Fifty--blue-chip stocks like Coca-Cola Co. and McDonald's Corp.--were the most popular stocks on the NYSE. In the early 2000s, Brazil, Russia, India and China were grouped together as BRIC, which condensed in an acronym the opportunities offered by the fastest-growing emerging economies.

The human mind latches onto acronyms because they tell a story, said Société Générale strategist Albert Edwards, who years ago stunned clients by saying BRIC stood for "Bloody Ridiculous Investment Concept."

The BRIC concept, created by former Goldman Sachs Group Inc. chief economist Jim O'Neill, has had its ups and downs. A Goldman fund set up in 2006 to focus on it initially rewarded investors with huge gains, but it plunged in value after China's economy slowed. Goldman closed the fund in 2015.

Mr. O'Neill defends his acronym and the concept behind it. BRIC "was an economic observation and prediction," he said. "FANG's got nothing to do with economics. It is just an acronym to describe highly fashionable stocks."

Ms. Fang, the academic and owner of FANG shares, in a research paper analyzed thousands of stocks from 1993 to 2002, a period that included the last internet bubble. She found that stocks with little or no media coverage earned higher returns than stocks with an overabundance of exposure.

"Less-touted stocks are more likely to be hidden gems," she said.

Still, she decided to scoop up FANG stocks, as well as Chinese internet stocks Alibaba Group Holding Ltd. and Tencent Holdings Ltd., because she saw them as industry leaders in large and growing markets. "When momentum is still unfolding, you want to ride that," she added.

The company that sports the actual FANG ticker symbol hasn't benefited at all from the mania. Shares of Diamondback Energy Inc., an oil-and-gas company, are down 3.9% this year.

That isn't lost on Diamondback's head of strategy and corporate development, Kaes Van't Hof, who regularly hears from his parents when FANG stocks are talked about on television.

"I'm like, 'I don't think they're talking about the same thing,'" he said.

Write to Steven Russolillo at steven.russolillo@wsj.com and Ben Eisen at ben.eisen@wsj.com

(END) Dow Jones Newswires

September 27, 2017 07:05 ET (11:05 GMT)