Facebook (FB) is cheap by fundamental standards, so is
Apple (AAPL), however Tesla (TSLA) and Amazon (AMZN) are the exact opposite, we
own them all. A big reason FB stands apart is because the company has casually
generated more than enough revenue to justify its stock price, but it has done
it with equally casual and explicit disdain for the shareholder.
Over time FB has gotten away with this dysfunctional
relationship because its users (clients) placed their trust in the company as
opposed to the product. Perhaps showing my age I’ve always found it curious how
companies such as Google (GOOGL) and FB have avoided what has been a decades
long denigration from my generation for every product from Big Macs to
Talcum Powder without actually harming McDonalds (MCD) global expansion nor Johnson
& Johnson’s (JNJ) lock on beauty and heath production.
But just as potato chips are unhealthy, some also taste
good. That said, FB has made some very clever acquisitions over the years which
seized on an unexpected gain. Namely that different generations are migrating
to different platforms such as Instagram and WhatsApp that are represented
within nearly 70 companies owned outright by FB and that’s made for enormous
growth in users, their data and the high stakes applications and advertisers that
pay heavily to play with them. At last count the company has $37 Billion
dollars in cash to plow into new acquisitions including products you can hold
in your hand such as Oculus, the Virtual Reality product or marketable software
in fields of Self-Generated Application Development, E-Commerce and Artificial
Intelligence. So in addition to favoring some exposure in the stock I’m
also curious if the company can actually achieve what is expected of them in
the long term, namely, protection of user privacy and what can be done in the
near term.
The issue of privacy has wide support among the public 45
and older and defended through powerful political legitimization. The US body
could very likely seek regulatory revenge in the shape of a tax, similar to the
European Community attacks over tech management of privacy issues which over
the past two decades has cost the group billions.
The Fed
The reason I’m discussing the Fed is because yesterday
two events took place. First the new Chairman of the Federal Reserve announced
that the body would be raising its targeted rates by .25%, totally expected.
What wasn’t expected was the Chairman’s announcement for strong growth
expectations, tight job market expectations and higher than expected inflation
to exceed 2.1% and moving towards 2.9%, the historical average. All this raised
the likelihood of four rate increases this year as opposed to the expected
three. This combined with continued challenge of current legislation going
after Chinese violations of the WTO may not mean a trade war but raises the
specter of retaliation.
The Markets
In my opinion, the sharp decline in the FB stock price
over the last few days has less to do with widely distributed positions of 2-4%
but more of a cut in concentrated 5-10% (and even higher) positions
held by Hedge Funds and young investors eligible for that kind of risk. All
of this has served to impact the broad indexes and for now, impact appears to
be more a reflection of redistribution of risk and characteristically for this
kind of environment the nervousness that takes place before earning season,
which begins at the end of the month. Right now I believe cash is a desirable
defense and I’ll be looking for opportunities in growing cyclical sectors such
as Healthcare. Likewise, we’ll maintain positions of 1-3% respectful of the
volatility that the abovementioned scenarios will create and like with all
positions in the tech space, for example, take some profit now and then. Every
major tech stock, including beloved Apple (AAPL) has given up price for some
compelling buys over the last 5 years.
