BLOG

Is There More To The US Growth Story Than FAANGs?

Taymour Tamaddon , Portfolio Manager

US growth investing delivered particularly strong performance in 2017 and, indeed, in the last decade. The frequently-cited FAANG companies (Facebook, Amazon, Apple, Netflix and Google/Alphabet) have played a significant role in driving the stellar performance of growth indices. But contrary to widely-held opinion, the rally in US growth stocks is more than just a FAANG story: there are many diversified sources of alpha beyond the five technology giants, if investors know where to look.

FAANG companies have been successful because they are innovative and disruptive, effectively changing the way their respective industries operate. However, there are examples of other growth companies that we believe exhibit similar features. While they fly a little lower under the radar, the following are examples of those we believe are well positioned to take a major share of established markets and generate significant free cash flows.
 

  • Intuit (Software)
    Intuit is a tax returns filing and small business accounting software company that is disrupting its industry. Its technology architecture has allowed the company to grow online subscription services in these areas – which are both popular and tend to retain customers – at relatively low capital intensity.

  • Red Hat (Software)
    Red Hat is an open-source software company that allows seamless access to on-premise database storage and cloud database service providers. Our insight – that companies would need to maintain a presence both on and off-premise – underpins our investment rationale. Companies can choose the cloud provider they want to use, as Red Hat’s software can interface with AWS, Microsoft Azure and Google cloud.

  • Stryker (Medical Equipment & Devices)
    Stryker is an innovative healthcare company specializing in hip and knee replacement surgery. Its leading position in 3D printing of replacement hips and knees and its robotic surgery product, are leading to dramatically better patient outcomes. The company is taking outsized market share, leading to higher profitability.

  • Boeing (Aerospace & Defense)
    Boeing is perhaps not recognized by the market as an innovator, nor a growth company. However, it is precisely this misperception that has provided us with an investment opportunity. We believe Boeing is a leader in a global duopoly and is a less cyclical business than the market believes. Air passenger trends are favorable globally, while Boeing’s 787 aircraft with its composite fuselage is the most innovative, fuel-efficient product available and so is attracting strong demand and generating significant free cash flow.
     

We have exposure to the FAANG stocks and have been significant owners of some of these companies in the T. Rowe Price US Large Cap Growth Equity strategy for some time. However, to put the relative performance contribution into context, the FAANG stocks have collectively accounted for only 21% of our outperformance of the benchmark over the past five years, while the vast majority of the alpha generated has come from sources outside these FAANG companies (Figure 1).
 

Figure 1: Majority of alpha generated by non-FAANG growth stocks

T. ROWE PRICE FUNDS SICAV - US LARGE CAP GROWTH EQUITY FUND
Total Attribution Effect
May 2013 - April 2018


Benchmark: Russell 1000 Growth
Source: FactSet

We are clearly in the later stages of the market cycle in the US. However, stock valuations still appear adequately supported at current levels by solid growth and a low inflation rate. Corporate earnings expectations have increased in 2018, boosted by US tax reforms. Even excluding this contribution, on a fundamental basis, many companies reported improving top-line and earnings growth above consensus expectations in the most recent quarter.
 

In this environment we continue to find many examples of the type of innovative, disruptive and cash flow generative businesses we look for – the majority of which are outside the high-profile FAANG companies.
 

Key Risks— Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The strategy is subject to the volatility inherent in equity investing, and its value may fluctuate more than a strategy investing in income-oriented securities.
 

201806-5280038

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.