Doug Kass: 'I Am Positioned Aggressively for a Stock Market Correction'

With vulnerability in the league-leading FANG stocks (see today's opening missive), I am positioned aggressively for a market correction--something few consider even as a possibility.

Finally, the Russell Index continues to lag.

I have added to an already large ProShares UltraPro Short QQQ ( SQQQ) position on the market's ramp early in the day.

Position: Long SQQQ large; short BAC large, C large, JPM large .

Back in February 2013 my pal Jim "El Capitan" Cramer brilliantly (and well-ahead of anyone else) coined the term "FANG" stocks --Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google, now Alphabet (GOOGL) .

As a survivor of the "Nifty 50" with growth stock investor Putnam Management in the 1972-1974 period and as a short seller during the dot.com boom in the late 1990s, I have seen the movie before.

Though I would not be a buyer at current levels, I can find little fault with Facebook and Alphabet shares as attractive investments (subject to more reasonable pricing) over time. Based on what I believe to be solid forward growth, neither is expensive.

For what it is worth, I estimate Facebook will grow Ebitd at 30% annually over the next few years. For Google, that growth in cash flow is about 15% per year.

For Amazon and Netflix, the valuations are another story. I would avoid both.

Amazon

Amazon is a truly great consumer service. However, it makes little economic profit. Home Depot (HD) and Walmart (WMT) would be great as well, but they both generate handsome returns on investment capital, pay significant and growing dividends and generate meaningful free cash flow. Amazon currently makes $13 billion on trailing 12-month Ebitd. This is pretax operating cash flow and, in certain cases, may equate to economic profit. However, the components of that $13 billion are rarely parsed by analysts.

Netflix

Netflix is a different situation. The market wants it to grow subscribers and could care less about the cost of doing so. Netflix does NOT invest in fixed assets. Depreciation has been more or less flat at $15 million for each of the last nine quarters. Like Amazon, Netflix is a great service for the consumer. With Season 5 of "House of Cards" just releasing, Netflix, like Amazon, recently hit an all-time high in share price.

The proliferation and popularity of ETFs and the dominant impact of machines and algos, which are agnostic to balance sheets, income statements and valuations, clearly have inured to the benefit of FANG and have produced a narrow leadership framework for our markets. But I have learned, after four decades of investing, to be skeptical when new paradigms are so readily embraced.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

Read more:

• Peloton can collaps by 86% under competitive pressure
• Hong Kong will continue to push down the financial markets!
• S&P on a historic high, analysts expect more gains
• 7 best exchange-traded ETFs for dividends
• Five cannabis stocks under $10 you need to buy