Since the start of 2022, investing on Wall Street has been nothing short of an adventure. All three major U.S. stock indexes have, at some point, entered a bear market, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite producing their worst full-year returns in more than a decade last year.

Typically, when the going gets tough on Wall Street, investors tend to turn their attention to perennial outperformers, such as the FAANG stocks.

Silver dice that say buy and sell being rolled across a digital screen displaying stock charts and volume data.

Image source: Getty Images.

The FAANG stocks have a long history of outperformance

When I say "FAANG," I'm referring to:

  • Facebook, which is a subsidiary of parent company Meta Platforms (META 0.20%)
  • Apple (AAPL 0.06%)
  • Amazon (AMZN -0.34%)
  • Netflix (NFLX -1.51%)
  • Google, which is a subsidiary of parent company Alphabet (GOOGL -0.02%) (GOOG 0.10%)

Over the trailing 10-year period (as of March 10, 2023), the benchmark S&P 500 has risen by 149%. By comparison Meta, Apple, Amazon, Netflix, and Alphabet (specifically, the Class A shares, GOOGL), were respectively higher by 542%, 863%, 562%, 1,010%, and 336%. All five have vastly outperformed the broader market, and were responsible for pulling the broad-based S&P 500 to new highs in 2021.

In addition to outperforming over long periods, the FAANG stocks are leaders in their respective industries.

  • Meta owns four of the most-downloaded and visited social media apps on the planet: Facebook, Facebook Messenger, WhatsApp, and Instagram.
  • Apple's iPhone controls roughly half of U.S. smartphone market share.
  • Amazon was forecast to account for nearly 40% of all U.S. online retail sales in 2022, according to a report by eMarketer.
  • Netflix is the streaming content share leader in the U.S. and abroad.
  • Alphabet's internet search engine Google accounts for more than 93% of worldwide search share.

But opportunity isn't always equal among the FAANGs. Right now, one FAANG stock stands out as historically inexpensive and ripe for the picking, while another could find itself exposed to a U.S. economic downturn and substantial downside in its share price.

The FAANG stock to buy hand over fist in March: Alphabet

Among the FAANGs, the one stock that stands out as most attractive right now is Alphabet. Not only is it historically inexpensive (a point I'll touch on a bit later), but all facets of its business appear well positioned to generate significant cash flow over the long term.

The biggest knock against Alphabet at the moment is that it's highly dependent on ad revenue. With a number of recession-probability indicators screaming that an economic downturn is coming, it's not a surprise to see advertisers paring back their spending in the short run.

But this is a pattern we've seen countless times before. Ad-driven businesses get taken to the woodshed by emotional investors who believe ad spending is gone forever. In reality, recessions tend to be short-lived, typically two to 18 months long, and advertising tends to be one of the first industries to bounce back when a new economic expansion emerges. This dislocation between the short-term share price in Alphabet and the long-term growth potential of advertising is something patient investors can take advantage of.

As noted, Google is a global search juggernaut. Since December 2018, it's accounted for no less than 91% of worldwide internet search share. Possessing a veritable monopoly on internet search affords the company rock-solid ad-pricing power more often than not. After all, advertisers are well aware that Google gives them their best chance of targeting their messages at consumers.

However, Alphabet is more than just its cash cow search engine. Streaming platform YouTube and cloud infrastructure service segment Google Cloud are expected to be significant growth drivers during the second half of this decade.

YouTube is the second most-visited social platform on the planet, with over 2.6 billion monthly active users. Every day, YouTube Shorts (short-form videos lasting less than 60 seconds) are netting more than 50 billion views. This represents a mammoth monetization opportunity for YouTube.

Meanwhile, Google Cloud's share of global cloud infrastructure service spending grew to an estimated 10% during the fourth quarter, according to tech analysis company Canalys. Enterprise cloud spending is still in its early innings of growth, and cloud margins tend to run circles around advertising margins. Though this is currently a money-losing segment, its pace of growth offers plenty of promise for Alphabet.

Lastly, Alphabet is historically cheap. Over the trailing five years, Alphabet has averaged a price-to-cash flow of 18.4 and a forward-year price-to-earnings ratio of 25.2. Investors buying right now are getting shares of Google of less than 15 times forward-year earnings and below 10 times Wall Street's consensus cash flow for 2024. It's a screaming bargain for long-term investors.

Two excited children playing with iPhone display models in an Apple store.

Image source: Apple.

The FAANG stock to avoid like the plague in March: Apple

But there's another side to this coin. Among the five FAANG stocks, none is in a more precarious position than tech stock Apple.

To be perfectly clear, Apple didn't become the largest publicly traded company by market cap on accident. It's the top dog because it's extremely profitable -- it generated $95.2 billion in net income over the trailing 12 months -- and it has an exceptionally loyal customer base. The company's physical products, such as iPhone, Mac, and iPad, have endeared people to its brand.

It's also a company that's led through innovation. Apple's pivot to subscription services will be a long-term boon for its bottom line. In addition to high, predictable margins, subscription services can help offset the revenue lumpiness that often accompanies iPhone replacement cycles.

Apple is the capital-return program kingpin, too. It's repurchased more than $550 billion of its common stock over the past decade, and it doles out one of the largest nominal-dollar dividends on the planet.

But if a U.S. recession does occur, Apple is, arguably, the most vulnerable of the FAANGs. In fiscal 2023, Wall Street's consensus is for Apple to report a 1% decline in sales. Before we saw recession indicators screaming that trouble lies ahead, Apple was already witnessing weaker-than-anticipated sales of iPhone 14. In fact, the company abandoned its initial plan to increase production because of weak sales. This sales decline is even more meaningful when you factor in that the U.S. inflation rate remains above 6%. Even with pricing power at its back, Apple can't move the revenue needle.

To add to this point, we're more than two years removed from Apple's 5G-capable iPhone hitting showroom floors. Though the 5G smartphone device-replacement cycle is liable to last for years to come, Apple, in hindsight, didn't differentiate iPhone 14 enough from previous models to entice consumers to buy.

Another concern for Apple is its lack of bottom-line growth. Access to cheap capital and share buybacks have been a sustained positive for the company's earnings per share. But with sales growth floundering, Apple's earnings growth has stalled.

Between 2013 and 2018, Apple was growing sales pretty consistently and valued at a forward-year price-to-earnings ratio of between 10 and 15.  Currently, Apple isn't growing, and investors are lining up to pay nearly 23 times forward-year earnings, based on Wall Street's consensus. In my view, this leaves Apple stock highly vulnerable to significant downside if a U.S. recession materializes. That makes it a stock to avoid like the plague in March, and possibly throughout 2023.