At the end of May, when Bank of America looked at some of the most widely held stocks by active managers, it found that FANG stocks (FB, AMZN, NFLX, GOOG/GOOGL) have returned nearly 30% YTD vs. 8% for the S&P 500. More importantly, it found that managers were 32% overweight Information Technology + Internet & Catalog Retail (a Discretionary industry), which was driven by a remarkable 71% overweight in FANG stocks.
This week, BofA's Savita Subramanian updated the study of most widely held active manager stocks, and found that while fund managers holdings of FANG and FAAANG (which also includes ACVO and ADBE), have modestly declined over the past two months, they still remains remarkably stretched, or as she puts it "active managers' disproportionate overweight in FAAANG relative to the Tech sector and Internet and Catalog Retail is even more dramatic than the FANG stocks."
But more interesting is BofA finding - both then and now - that since long-only funds did not appears to be bidding up FANG (or FAANG) stocks, which had remained relatively constant among their total portfolio hodings...
... the answer was that "the recent move in FANG may be driven more by short-covering than by active buying."
However, as Bank of America also notes, that short covering, if indeed that is the cause of the levitation, is ending as the short interest for both FANG stocks is now down to all time lows.
A separate analysis released today by Bloomberg's Stephen Gandel confirms as much, and notes that despite the seemingly pervasive negative sentiment against FANGs, everywhere from Goldman to Howard Marks...
Goldman Sachs Group Inc. strategists predicted an "air pocket" was coming in the FANG bubble. After a survey of investors, Bank of America strategists called FANG and other technology stocks the most crowded trade in the market. Oaktree Capital co-founder Howard Marks recently compared the FANG to the Nifty Fifty and dot-com stocks of the 1970s and 1990s, respectively, as well as other bubbles.
... the short interest for the four companies has sunk to a new record low: "collectively, the short bets against FANG stocks accounted for just 2 percent of their traded shares. Exclude Netflix, and the average short interest for the group drops to just 1 percent. That compares with an average of 4 percent for the S&P 500."
Some have pointed to the recent surge in Netflix and AAPL's blow off to new all time highs on Tuesday after earnings as confirmation that the shorts are right to stay away, others have said that the move in the company - whose growth rate is a mere shadow of what it used to be, and which has now posted declining Chinese sales for 6 quarters - was so acute precisely due to another batch of shorts throwing in the towel and covering, or as BBG puts it, "tech bears shedding their fur has pushed the stocks higher."
And while the lack of shorts may suggest smooth sailing for the group over the near immediate future, over the long term, a lack of skeptics could be bad. Gendel points out why:
The dearth of short interest suggests an enthusiasm for the shares that could be quickly popped if things turn south. And the falling short interest is odd given that the FANG stocks have risen an average of 37 percent this year, potentially setting them up for a fall, or at least a slip. Amazon, after all, trades at nearly 93 times its expected earnings for this year. Netflix's unending cash bonfire has burned through $2.1 billion in free cash flow in the past 12 months. The expectations for sales of Apple's coming iPhone are stratospheric even though the price of one model may top $1,000. Any of these situations would seemingly make for a good short bet, if anyone was willing to make it.
For now, almost nobody is, as most traders remain "paralyzed" (or perhaps complacent) and instead chose the comfort of the passive-investing, ETF, CTA herd which continues to grind stocks ever higher with less volatility than the bond market. Then again, with all the FANG bears having thrown the towel, this may be just the right time to go short... again. Judging by the recent price performance of the group, others may have gotten the same idea.