2 FAANG Stocks to Buy Hand Over Fist and 1 to Avoid Like the Plague

Although it might not seem like it at the moment, the stock market is one of the steadiest creators of long-term wealth. Including dividends, the benchmark S&P 500 has averaged a total annual return of around 10%. That handily outpaces the average annual returns for bonds, housing, and commodities.

But why settle for average? Over the past decade, the so-called FAANG stocks have left the S&P 500 eating their dust. When I say “FAANG,” I'm referring to:

  • Meta Platforms (META), formerly known as Facebook
  • Apple (AAPL)
  • Amazon (AMZN)
  • Netflix (NFLX)
  • and Alphabet (GOOGL) (GOOG), which was formerly known as Google.

Over the trailing-10-year period through July 1, 2022, Meta, Apple, Amazon, Netflix, and Alphabet (Class A shares, GOOGL) were higher by 415%, 566%, 860%, 1,740%, and 650%, respectively. Meanwhile, the S&P 500 has gained 181% over this stretch.

The FAANGs are industry leaders, well-known innovators, and tend to generate a boatload of operating cash flow that's often reinvested in their businesses. In other words, there's a very good reason these five stocks have been such strong performers.

But not all FAANG stocks are worth your hard-earned money at the moment. While two FAANGs stand out as amazing values that can be bought hand over fist, another longtime winner is flashing clear “avoid” signals.

FAANG No. 1 to buy hand over fist: Meta Platforms

The first FAANG stock absolutely begging to be bought by opportunistic long-term investors is Meta Platforms.

Shares of Meta ended last week more than 58% below their all-time intraday high that was set less than a year ago. Wall Street is clearly concerned about how the company's ad-driven platform will cope with the growing likelihood of a domestic and/or global recession. To boot, analysts have also been critical of the company's aggressive metaverse spending, which has weighed on Meta's profitability.

Although these headwinds shouldn't be dismissed, they're either short term in nature or they overlook big-picture growth initiatives.

For instance, Meta remains a social media beast. Facebook, Facebook Messenger, Instagram, and WhatsApp, which are all owned by Meta, are consistently among the most-downloaded social media apps. In the March-ended quarter, the company's collection of apps drew 3.64 billion unique monthly users. This works out to more than half of the global adult population visiting a Meta-owned asset each month. Businesses fully understand that their best chance to reach a broad audience is with Meta's apps, which is why the company boasts such incredible ad-pricing power.

Even though the company's sizable metaverse investments are unlikely to generate significant sales or aid profitability for years, the company has the operating cash flow and balance sheet to support taking chances on what could very well be a multitrillion-dollar opportunity. Meta generated over $14 billion in cash from operations in the first quarter, and ended March with $43.9 billion in cash, cash equivalents, and marketable securities.

Opportunistic investors can buy shares of Meta Platforms right now for less than 12 times Wall Street's forecast earnings for 2023, or about 10 times projected profit if you exclude its cash. It's simply never been this inexpensive.

FAANG No. 2 to buy hand over fist: Alphabet

The other FAANG stock worthy of being bought hand over fist right now is Alphabet, the parent company of internet search engine Google and streaming platform YouTube.

Not to sound like a broken record, but the biggest worry for Alphabet is the potential for a U.S. or global recession. Like Meta, Alphabet brings in the lion's share of its revenue from advertising. Unfortunately, ad spending tends to be one of the first things to be reduced when recessions occur. This has the potential to be an overhang for Alphabet's ad business until the Federal Reserve is done aggressively hiking interest rates.

But these recession worries appear largely overblown. Though recessions are inevitable, they typically last for no more than a couple of quarters. By comparison, periods of economic expansion are measured in years. Over long periods, ad-driven companies should benefit from the natural expansion of the U.S. and global economy.

Alphabet's foundation continues to be internet search engine Google. Data from GlobalStats shows that it has controlled no less than 91% of the worldwide internet search market over the past two years. As a practical monopoly, it shouldn't come as a surprise that Google can command superior ad-pricing power.

While Google has the potential to maintain low double-digit sales growth, Alphabet's numerous ancillary revenue channels are really exciting. YouTube, for example, is now the second-most-visited social media site on the planet (2.56 billion monthly active users). This is helping to drive subscription revenue as well as ad placement.

Alphabet's cloud infrastructure segment, Google Cloud, also happens to be the global No. 3 in cloud service spending. Cloud growth remains in its early innings, as evidenced by Google Cloud's consistent 40% to 50% annual sales increases. Due to the juicy margins usually associated with cloud services, this segment could play an important role in growing Alphabet's operating cash flow.

Like Meta, Alphabet has never been cheaper. Shares can be confidently bought right now for about 16.5 times Wall Street's forecast earnings for 2023.

The FAANG stock to avoid like the plague: Apple

On the other end of the spectrum is a FAANG stock that simply isn't worth investors' hard-earned money at the moment. At the risk of committing investment blasphemy, I'd suggest avoiding tech kingpin Apple.

Before I get into the reasons for avoiding Apple, let me clear the air: Apple is a solidly profitable company with an incredible balance sheet and capital return program. It's repurchased almost $500 billion worth of its common stock since the beginning of 2013 and doles out nearly $14.9 billion in dividends to its shareholders annually.

What's more, Apple has a globally recognized brand and is the dominant smartphone player in the United States. I'll reiterate: It's a well-run company.

However, bear markets have a tendency to compress earnings and sales multiples for growth stocks, and they're known for getting Wall Street refocused on value investments. Unfortunately for Apple, it offers the weakest growth prospects among the FAANGs and simply isn't all that inexpensive.

Apple enjoyed quite the pop following its introduction of 5G-capable iPhones during the fourth quarter of 2020. But each subsequent iPhone model only offers modest differences (for example, improved camera quality). This is going to make it increasingly tougher for the company to deliver sizable growth from its top-selling product.

Another concern for those willing to dig a bit is that Apple's share repurchase program is helping to mask its lack of growth. Buying back stock reduces the number of shares outstanding, which can make it appear as if earnings per share is climbing, even if operating income remains unchanged from one year to the next. For instance, adjusted earnings per share in the fiscal second quarter (ended March 26) grew 8.6% from the prior-year quarter; but operating income jumped by a less-impressive 5.8%. 

If you back out the positive impact Apple's buybacks have had on its earnings, investors are paying about 21 times next year's forecast earnings for operating income growth of maybe 4% to 5%. That's not particularly intriguing in a bear market, which is what makes Apple such an easy pass at its current price.

Originally published on Fool.com

*Stock Advisor returns as of June 2, 2022

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet (A shares), Amazon, and Meta Platforms, Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.