FAAMG Stocks: Pay Close Attention to Antitrust

By David Navarro, CFA® | Published: September 2021

Economies evolve over time. From big oil to electricity to the internet, inventions and new technologies transform the world as we know it. Naturally, during these transformations, companies within certain industries experience tremendous growth. From this growth, they become the top market capitalized stocks in the stock market.

Market experts argue over the length of this status and what the factors are that could knock those companies off the top of that list. 2021 is a prime example of this. The FAAMG stocks (Facebook, Apple, Amazon, Microsoft, and Google) comprise the largest portion of the S&P 500. This has been the case for many years now.

What could knock them out of the top spots? In my opinion, antitrust. With the potential for a heightened level of regulatory prosecution on these companies coupled with continued strong business metrics, it makes for an extremely difficult investing environment that I feel will force investors to use alternative measures to invest in the FAAMG stocks.

Most market pundits complain that the FAAMG stocks are dominating performance of the equity markets. This domination has led them to comprise a large portion of the S&P 500. One should consider the efficiency of the markets and recognize the earnings composition of these companies relative to the rest of the benchmark though. Charts below show the top 10 stocks (six out of ten are the FAAMG companies) represent almost 30% of the S&P 500. At the same time, the earnings contribution is almost 29% of the index. This is not to argue these companies’ future endeavors, but merely to give validity to their large positioning within the index.

Simultaneous with the superior growth of these technological companies has been the decrease in anti-monopolistic enforcement from the US government. Based on a 2019 report from the Washington Center for Equitable Growth titled “The state of U.S. federal antitrust enforcement”¹, the criminal antitrust enforcement action level is at an extremely low level. The amount of criminal antitrust cases and number of companies fined for antitrust violations has been steadily decreasing since 1990. Is this about to change? Possibly. Within the last year, the Justice Department has filed an antitrust lawsuit vs Alphabet (better known as Google) and the Federal Trade Commission has filed one against Facebook. Although the Facebook lawsuit was later thrown out in the district courts, it is an example of increased activity by U.S. enforcement agencies against monopolistic companies that could continue for the foreseeable future.

The justification of the high market capitalized companies exists. Technological advancements in personal products and services have propelled the FAAMG stocks and it reflects in their earnings. However, just as big oil was broken up in the early 1900s, these companies could be vulnerable to an elevated regulatory enforcement. Even though the globe seems to be in a secular technological era that is rapidly forging new paths for people, negative governmental attitudes towards monopolies could potentially be the initial blow to some of these companies. The biggest challenge for investors is U.S. regulatory cases typically take years to progress through the court systems. Even if more cases were filed, during that timeframe these companies should be able to continue their dominance in their specific industries and build free cash flow year after year.

---

¹https://equitablegrowth.org/research-paper/the-state-of-u-s-federal-antitrust-enforcement/?longform=true

---

About the Author – David Navarro, CFA^®
David Navarro, CFA^® is the Director of Research at West Capital Management, a subsidiary of WSFS Financial Corporation. West Capital Management focuses on developing custom planning and investment strategies tailored to each client’s unique circumstances and greater ambitions. David graduated with a B.S. in Finance from Rutgers University. He can be reached via email at dnavarro@westcapital.com.

---

This communication is provided by West Capital Management (“WCM” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that WCM believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investment products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

WCM is the business name of WSFS Capital Management, LLC. It is an SEC registered investment adviser that maintains a principal place of business in the Commonwealth of Pennsylvania. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from registration requirements. For information about WCM’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. WSFS Capital Management, LLC, is a wholly owned subsidiary of WSFS Financial Corporation.