A bit soon to ‘like’ Facebook?

Stocktake: Proinsias O'Mahony's look at the markets

Mark Zuckerberg, founder and chief executive officer of Facebook. Photograph: David Paul Morris/Bloomberg

Mark Zuckerberg, founder and chief executive officer of Facebook. Photograph: David Paul Morris/Bloomberg

Tue, Sep 17, 2013, 01:00

A bit soon to ‘like’ Facebook?
Facebook shares hit $45 last week for the first time since its stock market debut in May 2012. Then, the stock opened at $38 and briefly hit $45 before quickly collapsing, bottoming below $18 in the autumn.

That’s but a memory now, with shareholders enjoying 70 per cent gains since July’s earnings. There is, one analyst says, a “growing recognition” Facebook is not a fad. However, that doesn’t mean it’s worth $110 billion. Facebook trades on over 200 times earnings – higher than 497 of the 500 companies in the S&P 500, Bloomberg found – or 50 times forecasted earnings.

Young growth companies tend to be richly valued, but Facebook is particularly pricey.

Market commentator Mark Hulbert recently noted the median price-to-sales ratio of internet companies on their fifth birthday has been 5.87-to- one. Facebook’s revenues topped $6 billion last year and analyst project sales of $14 billion by 2016. Multiply that by 5.87 and you get a valuation of $83 billion, some 25 per cent below today’s number.

So, for Facebook to deliver, it will have to continue trouncing estimates or trade on a historically rich PSR, or both. Momentum is with the stock, but it’s hard to argue it’s a good long-term bet.

Europe set to bridge profit gap on S&P 500
European markets, up 11 per cent in 2013, have trailed the S&P 500 (up 18 per cent), but that may be changing.

The Euro Stoxx 600, which hit five-year highs last week, has gained 13 per cent since the end of June, almost double the gains of the S&P.

Bloomberg’s latest global poll shows 34 per cent believe the EU offers one of the best investment opportunities, up from 18 per cent in May and the highest since the question was first asked four years ago. The Stoxx 600 now trades at 14 times estimated earnings, its highest valuation in almost four years.

Why?

Mean reversion.

UBS recently noted that although US corporate profits are 20 per cent above 2007 levels, European earnings remain 25 per cent below their highs.

Société Générale analysts, too, note European earnings are 10 per cent below their 10- year moving average, while US profits are 25 per cent above the same average.

Similarly, European markets trade at a 36 per cent discount to US indices if one looks at cyclically adjusted price-earnings ratios, compared to an average divergence of 8 per cent since
1980.

With macro risk waning in Europe, investors are now betting the unprecedented profit gap will be bridged over time, fuelling market gains.

Some good returns on ‘emotional assets’
“Emotional” assets such as stamps, art and violins have lagged British equities but generated superior returns to government bonds, Treasury bills and gold since 1900, a new study has found.

Annual gross returns were in the region of 6.4 per cent to 6.9 per cent, or 2.4 per cent to 2.8 per cent after inflation.

There are some big caveats. Price volatility is large and assets are “exposed to fluctuating tastes and potential frauds”, while transactions costs are “substantial”.

Still, emotional assets can be rational investment choices, as well as allowing for the “psychic return” that comes from owning a “unique and aesthetically pleasing object”.


Gone but not forgotten
Nothing illustrates the folly of forecasting like infamous market timer and newsletter writer Joe Granville, who died this month at the age of 90.

Granville’s influence grew in the late 1970s after he correctly forecast market declines.

In January 1981, he told his subscribers to “sell everything!” causing the Dow Jones to slide 2.4 per cent in one day. (Days earlier, he said the market was going “straight up”.)

A year later, the Journal of Portfolio Management agreed his technical algorithm could time the market, Granville saying it was based on “the
laws of nature, principles of physics and technical
principles relating to music.”

He once arrived at a seminar dressed as a crown-wearing Moses and dispensed financial wisdom at Caesar’s Palace and Carnegie Hall while his trained chimp played the piano.

Granville was bearish in 1982, missing the biggest secular bull market and history. His gues- ses occasionally hit the mark, but his overall record was terrible, his recommendations estimated to have lost more than 20 per cent annually between 1980 and 2005.

Although he became a joke figure, Granville raked in mil- lions in his newsletter business. There is always a market for colourful fortune-tellers.

Hard to argue with the price – when it costs nothing
The greatest trade ever, strategist and blogger Josh Brown quipped last week, must be buying the legendary collected letters to Berkshire Hathaway shareholders from Warren Buffett, now on Amazon Kindle for just $2.99.

A great price for 700 pages of wisdom, but free is better.

Stocktake readers will enjoy James Montier’s Seven Sins of Fund Management, a 100-page PDF that offers a behavioural critique of the industry.

It’s superb and, like Buffett, you can’t argue with the price.





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