Why strategist Tom Lee is turning bullish on these four hot stocks

Why strategist Tom Lee is turning bullish on these four hot stocks
Why strategist Tom Lee is turning bullish on these four hot stocks

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After advising investors to fade the so-called FANG stocks in 2016, well-known strategist Tom Lee now says that the group of tech stocks could be one of the best bets this year.

"This year we're flipping, and we actually think FANG is going to outperform the market [by] as much as 31 percent," Lee, founder of Fundstrat Global Advisors, said Friday on CNBC's "Trading Nation."

Though it might seem counterintuitive to see these high-flying tech stocks — Facebook, Amazon, Netflix and Google parent Alphabet — as overvalued, Lee furnishes a surprising stat to make just that argument.

The four companies "accounted for nearly 20 percent in the revenue growth over the last five years in the S&P, but they've only captured 13 percent of the market cap growth, meaning there's still a catch-up on the market cap to how much they've contributed to the revenues," Lee pointed out.

In addition, the tech stocks could be great picks for inflationary times. With their reliance on highly skilled employees and wellsprings of intellectual property, the four names have high market value per worker. That means that if wages rise, these companies could see their expenses rise less than those in more labor-intensive industries.

To be sure, Lee's call may not feel particularly contrarian insofar as all four of the stocks are outperforming the S&P 500 this year. Indeed, the acronym was coined by Jim Cramer to refer specifically to large tech high-fliers.

But the group did underperform the market in 2016, amid broader optimism about the economy as a whole. And Lee argues that it makes sense to view FANG as a sector unto itself, noting that if it was one of the S&P 500's sectors, it would be the eighth largest, ranking higher than REITs, utilities, materials and telecom.

When asked to name a favorite FANG stock, Lee chose Amazon, which he called "a really differentiated business model." His least favorite is Netflix, which he said could fall prey to regulatory changes around net neutrality.

CNBC

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