Much of the market bull run has been led by the technology growth giants known as the ‘FAANGs’ – leading to them reaching lofty valuations – but manager Jarrod Cahn has just added Facebook to his value-based portfolio for the first time. 
The FAANGs – Facebook, Apple, Amazon, Netflix and (Alphabet subsidiary) Google – are five of the best-performing technology names in the market. They have been popular with fund managers, although their strong growth might not make them an obvious target for those with more of a value bent.
However, Cahn – who runs wealth manager Credo’s Best Ideas Portfolio as well as the Credo Global Equity fund and approaches investment with a value mindset – has added the social network on the back of its recent falls.
Performance of indices over 5yrs
Source: FE Analytics
The manager bought Facebook when it was trading on price-to-earnings (P/E) multiple of 17x, which is the cheapest valuation the firm has been at in both absolute and relative terms since its initial public offering (IPO) in May 2012 despite the fact it has delivered “robust” earnings-per-share growth.
Highlighting why he likes the company, Cahn added: “We believe that digital advertising will continue to attract incremental advertising dollars and there are a limited number of platforms on which they can be spent, Facebook (including Instagram), Google, and Amazon being the primary candidates.
“[We like the company’s] highly profitable, unique platforms Facebook and Instagram, which have a network moat and the ability to do targeted advertising. Facebook is also one of the few digital platforms where political advertising dollars can be spent and where consumers may be inclined to engage with the content. Political advertising does not sit well on a platform such as Amazon, for example.”
Of course, Facebook has not covered itself in glory this year after the firm was thrust into the Cambridge Analytica data scandal. UK-based political consulting firm Cambridge Analytica had harvested personal data from millions Facebook profiles without users’ consent, then deployed it for political purposes.
There was a massive public backlash when news of the scandal broke, which prompted a substantial fall in Facebook’s share price, the suggestion that its users should delete their profiles and calls for tighter regulation of how tech companies use data.
But Cahn does not expect the issue to have a significant direct effect on the company’s earnings. “We don’t think that negative headlines will materially affect advertising revenues directly and any effect should dissipate,” he explained.
“We have seen similar scenarios with restaurant stocks before, for example with Yum Brands China in 2014, where negative headlines temporarily impact the business. However, as the news headlines recede into memory, consumers tend to return, should the product be strong enough.”
Performance of Facebook since IPO
Source: Google Finance
That said, the manager does see a risk from an “associated regulatory blowback” when it comes to privacy and targeted advertising, which could challenge its business model.
“We are conscious of the risks of increased regulation which would see governments clamping down on the way that technology companies are able to use consumer’s data,” he said. “In particular, any regulation which would impede Facebook’s ability to utilise their database for targeted advertising would be of concern to us.”
However, he noted that the General Data Protection Regulation (GDPR), which covers the data protection and privacy for all individuals within the EU and the European Economic Area, actually seems to have helped larger tech firms by “entrenching their moats”.
Cahn is split on the outlook for the other members of the FAANG group and currently only holds Facebook.
“We only really look at any FAANGS that are cheap enough and profitable – so something like Google or Apple we’d look at, but Netflix and Amazon aren’t investable for us,” he explained.
“Valuation is really important to us when we look at an opportunity. We focus on stocks where the valuation is not reflective of the future earnings potential, providing both an opportunity, should things be better than expected and support should things not.
“Sentiment remains very positive on Netflix and Amazon with the accompanying high multiples, and whilst consensus may be correct on the earnings trajectory, there is limited valuation support should things not be quite as rosy as is currently expected.
“In contrast, there has been significant negative news flow surrounding Facebook in recent months. This is, we believe, an opportunity to own a company at a valuation that is close to the market, with better growth prospects.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Cahn has managed the £32.7m Credo Global Equity fund since its launch in July 2017 but has a longer track record on Credo’s Best Ideas Portfolio.
The manager takes a value-based approach to investing, as noted above, but also needs to see quality – in terms of profitability and cash generation – in order to buy a stock.
“We try to look for scenarios where negative short-term news creates an opportunity to buy great companies at reasonable prices or reasonable companies at cheap prices. Valuation provides both an opportunity should the negative news prove temporary and support (a margin of safety) should it not,” he explained.
“We like to buy quality companies which are profitable and cash generative with high returns, where we believe in the long-term future of the business and the market is worried about the sustainability of the business model. This, we believe, presents an opportunity to realise value as the negativity recedes and investors begin to have confidence in the company again.”
Credo Global Equity resides in the offshore universe and has ongoing charges of 1.7 per cent.