Making money over the last three years meant holding just five stocks, icons of the new internet revolution. Those five stocks — Facebook, Amazon, Apple, Netflix, and Google — drove gains that averaged 177% over the three years through June compared to a modest return of 33% on the S&P 500.

But the thing about momentum trades is that investors rush en masse to the exits when that momentum slows. Nobody wants to be the last one holding terrifically-overpriced shares of a company that is no longer the darling of Wall Street and Main Street.

#-ad_banner-#Over the past month, the FAANG portfolio has returned just 0.3% with heart-stopping, double-digit losses for both Netflix and Facebook. All this is as the S&P 500 bounced 3.7% in anticipation of Q2 earnings and solid economic growth.

None of this means the second internet revolution isn’t alive and well. Sales to e-commerce as a percentage of total retail are still growing steadily and 5G promises to make the internet of things (IoT) a reality.

It does mean that investors will be looking for a change of leadership. It means a new group of stocks could take the spotlight.

It means, things could get MESY.

The FAANG Trade Loses Its Bite
FAANG has been the buzzword for more than three years — the investing advice scribbled on napkins and recommended by cab drivers that we all knew would come crashing down someday.

Shares of the five companies have advanced from 52% to 320% in the two years through June as investors rushed into the acronym. Earnings growth has been impressive, but prices have outpaced profits for most in the group. For example, earnings at Apple have increased just 15% over the last two years versus an 81% surge in the share price. Google has seen a 16% increase in earnings boost shares by 58% over the period.

By the end of May, the FAANG stocks had grown to over half the market capitalization of the Nasdaq 100 and more than 10% of the S&P 500. That’s just five companies representing a tenth the value of the index.

But any momentum trade that reaches so high and lasts so long is destined to come to a horrific end…taking the escalator up and the elevator down.

Facebook shares plunged 20% after the company reported mixed earnings, beating on profits but coming up short of expectations on revenue and user growth. The disappointment centered on the company’s rising expenses and ongoing issues with privacy and data leaks.

Shares of Netflix lost 14% when the company missed subscriber estimates for the first time in five quarters. The company reported a gain of 674,000 subscribers in the United States versus expectations to add 1.23 million and also missed on international growth.

I’m not saying that the five bellwether names will not be an integrated part of our daily lives. I’ve no doubt we’ll be talking about each long after the robot uprising enslaves us all.

It’s just that dwindling sentiment is a death knell for momentum stocks. Any time investors are being asked to pay over 100-times expected earnings, those earnings better be all but guaranteed.

The Fall Of A Buzzword
But the largest economy just booked its fastest economic growth in half a decade. Even as rates rise and trade fears mount, the bull market is poised to become the longest in history and could add years more before a reckoning.

Online retail sales are still just above a tenth of total retail in the United States and well below that percentage in other parts of the world. The creation of 5G networks promises internet speeds of 1,000-times current 4G technology and could bring everything online from toasters to lightbulbs.

Fading sentiment for the FAANG stocks isn’t going to stop the internet revolution, it only means that other tech companies will have the opportunity to become investor darlings.

MercadoLibre (Nasdaq: MELI) is the undisputed leader in e-commerce across Latin America with 223 million registered users. Internet usage in the region is still just 70% with 450 million people connected. That leaves a lot of room to grow to the penetration rate of 90% in North America, especially considering rising disposable income across LatAm countries.

Registered users increased 22% last year with a 34% increase in buyers. The second quarter is expected to mark the final in three consecutive quarters of negative earnings on an increase in Brazilian postal rates.

Besides strength in ecommerce, the company’s MercadoPago digital payment processor could be a takeover target if PayPal ever wants to expand in the region. Earnings are expected to jump to $1.20 per share over the next four quarters and close 2019 at $2.17 per share.

eBay (Nasdaq: EBAY) isn’t quite the hot new tech we see in others but has recently announced two programs that could significantly add to growth and earnings. The company announced in January that it would start acting as the intermediary for payments, keeping users on the platform and booking the fees between 2% to 3% enjoyed by PayPal for more than a decade.

EBay is also rolling out product listing ads (PLA) similar to those available on Amazon and boosting sales as a percentage of gross market volume by 2% or more. Shares are lower by 5% over the last year and clearly not pricing in the upside from new programs. Expectations for full-year 2018 are for $2.30 per share, an increase of 15% from 2017, but could be increased significantly when Q3 is reported in October.

Snap (NYSE: SNAP) has largely escaped the privacy and fake news scandals that have hit larger social networks and may benefit with stronger user growth. A platform redesign caused Q1 to miss widely but testing over the last quarter may just help the company surprise on the upside against lowered expectations.

I see similarities to Facebook’s rocky start with monetization after the 2012 IPO, from which shares have jumped nearly ten-fold. Daily Active Users (DAU) increased 15% in the year to Q1 with 191 million global users and 81 million DAUs in North America. First quarter revenue jumped 54% from the prior year as the platform continues to increase ad load and average revenue per user (ARPU) increased 34% over the period.

Yelp (NYSE: YELP) has moved closer to its core strengths with the divestiture of Eat24 as a transaction intermediary between local business and customers. The integration with Grubhub turns a once-competitor into a partnership.

The go-to website for restaurant reviews, active advertising accounts and ad revenue both grew 21% in 2017. The company acquired NoWait, a reservations platform, last year and could begin monetizing it to add to revenue. The company’s venue Wi-Fi business also brings promise of potential growth through ad revenue.

Risks To Consider: As the FAANG trade unravels, it should be clear that acronyms don’t make for a legitimate investing strategy. Investors should follow clear fundamental strength in choosing stocks for their portfolio.

Action To Take: Take advantage of shifting sentiment in internet stocks to reposition in strong companies with catalysts for growth.

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