While the FANG stocks have been choppy the last two years, they still dominate headlines and mind share among investors.
Big Tech has come under scrutiny recently as states attorneys general and the U.S. Department of Justice conduct antitrust probes of some of the country’s largest tech firms, including three FANG names.
Despite this, the quartet—Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Google-parent Alphabet (NASDAQ: GOOGL, GOOG)—are all up for the year, with Facebook up 37% year-to-date, Amazon up 14.5%, Netflix up 5%, and Google up 16% so far this year.
But even as these big-name stocks are delivering returns, they don’t look as appealing as the “mini-FANGs.” That’s according to Leuthold Group chief investment strategist Jim Paulsen.
Paulsen wrote in a note to clients this week that small cap tech stocks look like a bargain now compared to their large cap counterparts, noting that the S&P 600 Small Cap Tech Index trades at roughly half the valuation of the S&P 500 Tech Index.
The strategist also says that profit estimates for small cap tech stocks are higher as well, as the S&P 600 tech index has a long term growth estimate 43% higher than the S&P 500 tech index. Thus, “the mini-FANGs offer a significantly higher growth profile at a substantially lower valuation,” Paulsen wrote.
Investors may be wary of Paulsen’s take, however, as small caps have trailed large caps for years. The Russell 2000 small cap index has returned just 9.5% so far this year, while the S&P 500 is up 17% year-to-date. Small caps also trail the return of large caps over the last 10 years on an annualized basis.
But Paulsen argues that if economic data improves and inflation picks up a bit, small caps should outperform as they historically do well when inflation is rising.
He also points out that volatility has spiked recently for small cap tech stocks compared to large caps, which has historically signaled a period outperformance for the group.
Paulsen says this group of stocks “are less popular, widely under owned, offer a substantial valuation upgrade, a faster long-term growth profile, and are not in the crosshairs of antitrust regulations.”
Of the group, analysts are most bullish on Qualys, and their average price target for the stock indicates nearly 26% upside over the next 12 months. Robert Baird analyst Jonathan Ruykhaver recently reiterated his rating on the stock and set his price target at $100 – 35% higher than the current price.