‘There is nothing permanent except change’ – Heraclitus
It really is quite something for a single company to lose a cool US$100 billion of market capitalisation in a single day…but social media behemoth Facebook managed this last Thursday.
So what caused this disaster day when over 20% was wiped off the value of Mark Zuckerberg’s creation? The simple answer is not that Facebook is going to disappear off the face of the corporate world but that – simply – it is set to grow less slowly as potential regulatory and privacy concerns grow and the cost of compliance and staying relevant mount. And less growth and more compressed cash flow generation is valued less highly by a stock market that previously was rabid with desire for the leading technology names.
Stock market valuation is a funny business, part science and part crystal ball peering art trying to figure out where global trends – and hence company profitability – is going. For most sectors the glass is either half empty or half full and the savvy analyst or fund manager adds value by spotting when a switch is just about to occur, perhaps because a prevailing consensus view is too optimistic or too pessimistic. However for much of the technology industry – especially the internet/social branch related branch – the cup has runneth over in the last few years. This is why any signs of weakness see a share price dump.
All of this is why the Global Dynamic Opportunities Fund has avoided shares like Facebook and its sector peers since inception. When the consensus is so deeply in love with a sub-sector the chances of further appreciation are suitably compressed – as Facebook investors found out late last week. Today my instinct would still not be to buy Facebook shares as the issues raised in the last quarterly numbers are not the easiest to fix and will take time and money. For me this is consistent with a lower valuation than today’s.
By contrast – during the last week – following a cash inflow, additions were made in a number of existing portfolio names including (among others) names such as the cash generative technology stalwart IBM, the high yielding Philip Morris International and the out-of-favour French retailer Carrefour. The latter updated the market with its own quarterly numbers a day or two after we had augmented our holding and, it was very pleasing to see overt progress on their corporate turnaround plan, which is akin to that employed by a previous portfolio winner Tesco.
Change is the constant refrain of financial markets. However you improve your odds of benefiting from such evolutions if you always acknowledge and respect the crowd but never feel compelled to walk alongside them.