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Facebook (and others) – risks now apparent, but should you exit tech?
Depending on which news media you read, you are pretty much bound to have heard about record falls in the price of Facebook shares, apparently due to a slowdown in the rate of advertising revenue.
Of course, Facebook and for that matter Google, are in trouble with politicians for behaving “without moral leadership” to quote. This factor seems not to have much impact on the share prices. If you have any detailed knowledge of the history of the oil industry (the book to read is “The Prize” by Daniel Yergin), it will all look pretty familiar. I am surprised President Trump has not started tweeting about anti-trust legislation, something that was prompted by the utterly disreputable behaviour of Standard Oil (the largest remnant of which is now Exxon Mobil). Later this legislation was used to attack IBM, which in my college days was seen to be so large as to be able to outdo many nation states. I realise many young folk won’t even have heard of IBM!
As I mentioned in a another recent post about share price swings, these are most dramatic where the share price is justified on the basis of expected future profits growth, with the psychological overlay of the “fear of missing out” (FOMO). So if profits growth is at risk and investors are sitting on large paper profits, they will dump shares in an instant. There is a very old cliché in the investment world that a profits warning is always the first of many. That default idea also exacerbates sell offs.
So, should investors now pull out of tech funds? I personally will not. Some fund mangers will see a fall in prices as a buying opportunity because the cultural change (like the adoption of oil as a fuel for motor vehicles as opposed to use in smelly heaters and lights) is genuine, set in and will not be reversed. There will be winners and losers, new legislation and even systemic shocks to all the share values in the market, but I have no doubt that IT and media linked together are driving forces in business and profit generation for many years to come.
New example porfolio added
There are now 3 example available to subscribers: adventurous and cautious growth and one suitable for a regular income withdrawal.
You can view them here if you are a subscribing member.
I will add an ethical portfolio next.
It’s not cricket!
Talking about India – ups and downs
I am a follower of cricket and of course the highly regarded Indian cricket team is touring in the UK at the moment. England came out top of the one day international series but it was a good fight. India is also seen as a rapidly developing emerging investment market and has been a destination for large flows of investment funds in recent years. Of course, Brits know that Indian businesses can be large operations with multi national subsidiaries these days owning chunks of British industry, including such gems as Jaguar Land Rover.
Why I don’t buy individual listed shares
ASOS
I notice today that shares in the on-line retailer ASOS fell 11% or so when it announced it was only going to grow sales by 25%. This is classically what happens when a share is priced on the basis of future profits growth, not current earnings. So although ASOS sells clothes, its shares are valued more like a tech company.
A little basic analysis
Bloomberg, the market data and analysis business, is estimating that profits at ASOS might make GBP100 million this year. Not bad, but not much on a market capitalisation of over GP4 billion. The price to earnings ratio published in over 70! Norms are in the range 10 to 20, by the way.
I also read that the company will spend about 3 times the profits estimate on new warehousing capacity (not in the UK, of course, because of Brexit). I did not quickly find out where it gets the money to pay for that.
A graph of the share price shows that investors who bought in after the last price crash would have done very nicely, but in my view the valuation is propped up by momentum not any recognised sign of good value or dividend prospects. You get a 1% or so yield for taking a huge risk.
Many of the shares will be held in large blocks by investing institutions and if they sell off the momentum reversal will see the price fall like a stone. A 50% loss is more than feasible, although I have no way of knowing that will actually happen. I am just using this as a classic example.
But maybe…
Some might think that the past results, the quality of the management, the changes in shopping patterns or similar mean that the share price has further to go. In the near term, that could be right. I would prefer that call to be made by a professional fund manager with access to all the latest data and maybe the opportunity to talk to the company’s top management. Best of all, I would like my fund manager to have bought the share after the last price collapse and now sold out on a large gain!
11% down?
Personally, I could tolerate my portfolio falling 11% over a few weeks in the event of a global stock market correction – what is called systemic risk, because I know that will be reversed over time and I can live on my reserve assets. But losing 11% in a day and maybe much more permanently is not a risk I think anyone should take without having plenty of other resources. I will be sticking to my portfolio of diversified funds.
Update to Important Information
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