The bear case for FANG and why it’s worth holding on

The bear case for FANG and why it's worth holding on

After the decline in the FANG stocks on Tuesday, CNBC’s Jim Cramer issued a warning to investors who own the technology-laden group.

“I just wanted to get in front of tomorrow’s storyline,” the “Mad Money” host said. “You better believe the obituary’s being written once again right now, this time with the death notice containing two As and two Ns, as in FAANNG, or Facebook, Apple, Amazon, Netflix, Nvidia and Google, the company now known as Alphabet.”

Weakness in the FAANNGs is bound to be taken seriously, which is why Cramer looked at the broader market layout, starting with the GOP-led tax overhaul.

The sweeping tax cuts Republicans are chasing could put a trillion-dollar hole in the U.S. deficit. That would lead the government to borrow money, flooding the bond market with supply and driving interest rates higher.

But higher interest rates usually lead to higher inflation. Inflation erodes purchasing power, which in turn diminishes future earnings estimates.

“Given that the FAANNG stocks represent big bets on the future earnings of high-growth companies, … inflation’s real bad for them, so their stocks sell off when rates go up,” Cramer said. “Let me simplify it: higher rates often lead to lower prices for the most juiced stocks out there, and FAANNG be the king of the juice.”

To make sense of the noise (and explain why panic is fruitless), the “Mad Money” host went over each FAANNG stock’s individual bear case.

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