Beyond FAANG investments, MOAT stocks provide equally good return opportunities

By Aditya Sesh

FAANG is now a common lexicon for investors worldwide. It represents a group of US Stocks that cover Facebook (now called Meta), Apple, Amazon, Netflix, and Google ( now called Alphabet). These stocks have worldwide applications and if you apply cold statistics, a billion plus people in the world still need to be connected to the internet. This category represents an untapped market for the FAANG Group in addition to the people yet to be connected to the web.

There are 5.30 Billion Internet users in the world. Thus, suffice it to say that this group represents the potential to grow further. The FAANG group is a significant member of S&P 500 and the market can move with the fortune of these companies. The total market cap of the FAANG group is in excess of US $ 6 Trillion of the total market cap of US $ 44 Trillion of the US Market. Many investors worldwide including from India have continued to buy into these stocks mostly using the International portfolios of India domiciled Mutual Funds and Liberalized Remittance Scheme of RBI.

However, the US Equity market represents opportunities beyond the FAANG group and investors need to look into other options in the market. When doing so, investors need to look at companies where the US has significant barriers to entry or in entities that have a significant competitive or economic advantage; this is called a MOAT.

The classical sectors where the US has huge advantages are the Aerospace Defence, Semi-Conductor, Agribusiness, and Semiconductor equipment. Let us discuss the MOAT that some of these companies enjoy and the returns that these companies have delivered mainly in Aerospace & Defense.

It is well known that the US is an innovator, global leader in the defense industry. This industry is largely private, extremely large, and has clients worldwide, mostly governments. This industry benefits from critical mass, deep research, and a head start; thus a Moat has already been created in terms of steep entry barriers and time to scale up.

The defense industry today no longer remains confined to arms, ammunition, tanks, airplanes, missiles, etc. Today the defense industry includes equipment for cyberwar, biological war, information war, drone attacks, and space war. This industry today is deep in technology, AI, technology sales, etc. There was a period in the past when the world was relatively calm.

No longer! The Russian-Ukranian, The Chinese-Taiwan Flare up, India-China border tensions, Chinese Aggression is South China Sea and Taiwan, Afghan War, and many other skirmishes have only increased in the last few years and many more will erupt over the years. Across the world, nationalists are in an eyeball confrontation with the liberals to secure their borders. This has increased the importance of defense to protect the country. A scan of country budgets reveals a large increasing allocation for defense. Having said this US is followed by France, UK, Russia, Israel etc who are active competitors.

The US Aerospace and Defense Industry is a complementary close-knit industry and thus bundled together. In this industry, revenues come from equipment sales, technology sales, after-market (secondary) sales, spares, services, etc.

Since most of the segments have a few players, the pricing power is higher thus leading to both volume and yield growth. Thus the revenue streams are both lumped and perennial. That having said, this industry is highly politically sensitive and any geopolitical scenarios can produce both an opportunity and a sanction or embargo can mean a loss of opportunity as well.

The larger countries are becoming transparent by the day and opting for Government to Government sales as well. Thus the exporting government actually ends up marketing their companies to importing countries. This industry of course has dark shades too, especially when there are illegal arms sales and export to countries that use these arms to inflict pain on other countries.

Many of the players in this industry are listed on the stock exchanges since they need a huge capital to fund their research and development in addition to production.

S&P Aerospace & Defense Select Industry Index, Spade Index, Defense Index,, Dow Jones U.S. Aerospace & Defense Index are some of the benchmark indices that one needs to track this industry.

As a primer one may invest in one of the many Exchange Traded Funds in this sector which is well represented. A DIY investor, however, can look up the individual companies that have the potential to beat the benchmarks. A peek into the index will reveal many familiar names, as most of the companies in the sector also sell equipment or technology to civilians.

In a three year time frame, the Industry sales are roughly growing at about 3% yearly, while the earnings have grown at around 15% yearly. The market cap and thus the prices have moved up by about 12% yearly. The Price Earning ratio of the industry is below its 3-year average of 28, currently at 26. At a 1.73 PEG Ratio, the industry seems decently priced. In my opinion, the industry in the US needs study and a look as it looks reasonable.

(Author is Founder and Managing Director of Basiz Fund Service. Disclaimer: The author has researched this industry and the affiliated companies have positions in the industry companies in the US.)