Skip to the content

Are investors wrong to snub FANG stocks?

19 September 2017

Dan Brocklebank, director at Orbis Investments, tells FE Trustnet why it is a “dangerous assumption” that US tech stocks have reached levels last seen during the dotcom bubble of 2000.

By Lauren Mason,

Senior reporter, FE Trustnet

E-commerce giant Amazon has been unfairly shunned by many global equity investors, according to Orbis Investment’s Dan Brocklebank (pictured), who said those who believe it is too expensive aren’t adopting a long-enough time horizon.

The director at the company, which manages the five crown-rated Orbis Global Balanced and four crown-rated Orbis Global Equity funds, said the rising power of e-commerce as an investment theme has been played down by many investors, who instantly dismiss the so-called FANG stocks (Facebook, Amazon, Netflix and Google) as being in a valuation bubble.

That said, he believes it is vital to diversify risk across portfolios and warned that trackers of indices such as the NASDAQ 100 have dangerously high levels of concentration in the global tech giants.

“Some 43 per cent of the NASDAQ index is in the top five stocks. That level of concentration would not be allowed from active management because the regulators would deem it to be reckless. So why is that allowed in a tracker fund?” Brocklebank queried.

“The concentration I think is a very real issue which, in the short term, has the potential to have a negative impact on flows if there is a big reversal in sentiment.”

However, the director urged investors to look over longer-term time horizons and to think more pragmatically about the valuation of stocks before jumping to conclusions.

For instance, he said many investors are concerned that US tech mega caps are behaving similarly to how they did in the throes of the dotcom crash, shortly before the NASDAQ 100 fell 82 per cent over the course of two-and-a-half years.

Performance of indices 11/03/2000 to 09/10/2002

 

Source: FE Analytics

In an article published last month, Miton’s Hugh Grieves told FE Trustnet that FANG stocks are indeed expensive and that their growth is unlikely to be unsustainable.

“Some of these stocks are looking quite expensive and are pricing in big assumptions about future growth. Now that these companies have delivered this growth in the past, how are they going to extrapolate that growth out into the future?” he warned.

However, Brocklebank said is it a “dangerous assumption” to believe US tech stocks are nearing the highs reached during the dotcom bubble, as investors need to look at the collection of individual companies that make up the index.

 “If you looked at the index back in March 2000, it was all basically business to-business companies that were selling products which were essentially capital spending by companies, and which were in the process of – because it was so competitive – being commoditised,” he reasoned.

“So, it was fiercely price competitive, there was a huge need to reinvest and keep generating profits and, even if you compare the multiples of that group back in March 2000 to the multiples today, they are now one-third – not a third less – one-third of what they were back in March 2000.”

The director said that, aside from crude valuations, another critical difference is that FANG stocks are business-to-consumer franchises and therefore have more ‘sticky’ business models.

“Whether you’re an Android or an Apple person, the chances are you’re not going to switch this year and, if you like Facebook, you’re very unlikely to switch away from it because you have your network of friends on there,” he explained.


“What that means is that, inherently, for any unit of profit, those businesses must be much more valuable because of the duration of those cash flows from consumers. It’s a bit like comparing apples with oranges, if you look at the index back in March 2000 and recently.”

Given the performance of tech stocks in 2000 is therefore an unfair comparison, Brocklebank said a good proxy for Amazon – which is a top 10 holding in the Orbis Global Balanced fund – would be when the last major US retail disrupter came to the market.

“It’s not controversial to say that Amazon has led a revolutionary new retail format that they’ve engineered and have become the masters at,” he continued.

“The last big change in retailing in the US is nothing recent – it was probably Walmart. The management’s goal was to put a big retailer in easy driving range of massive swathes of the population. They were offering hundreds and hundreds of units so the customers have massively more choice.

“They then used their economies of scale to drive prices down and passed those savings onto customers in the form of lower prices. It sounds awfully like what Amazon is doing today, except they’re doing it online.

“So, then you step back and say, ‘okay, maybe Walmart’s arrival is a better proxy for Amazon’s arrival’. But if you were to say that Amazon has outperformed for 10 years and can’t possibly outperform for another 10, well Walmart outperformed for 30 years – that argument doesn’t hold.”

When it comes to Walmart, Brocklebank’s research showed that the company will have still made investors a significant profit when the stock was trading at historically high multiples.

The director also said Amazon has a significant advantage in that e-commerce is far more of a “winner takes all” market and that the dominant company will be far more difficult to disrupt. He pointed out that online businesses also have much more of a global reach and therefore have greater capacity to grow over the long term.

“If you think of Amazon compared to Walmart, it probably has a better ultimate destination it can get to in terms of dominance in the market share,” he said.

“Another key difference is that, when Walmart wanted to expand it had to build a new store. From an accounting perspective, if you build a new store, the investment in that is part of your capital expenditure.

“So, the cost of that new store comes through your capex line and it hits your profits and loss statement through depreciation.

“In Amazon’s case, they build some warehouses but they’re tiny in relation to the size of the operation. Their investment in growth is in marketing and customer acquisition. I think you can credibly say that the portion of their advertising and marketing is actually about growth rather than maintaining their market position.”

While Brocklebank also has smaller weightings in Facebook and Alphabet (Google’s parent company) because they are beneficiaries of secular trends, but he has also ventured further afield in a bid capitalise on the long-term rise of e-commerce.

One such example in the portfolio is Argentine company MercadoLibre, which is a top 10 holding in the Orbis Global Equity fund.


“South America is around six years behind [the US] in terms of e-commerce penetration,” the director continued. “You’re paying similar multiples but you obviously have a much greater runway still ahead of you.

“The difference is that, with MercadoLibre, it’s not entirely clear whether they will end up the dominant partner – we’re pretty confident they will and as every year goes past nobody else emerges you challenge them, so you can get more and more confident in that they are the dominant player.

“The reason it’s controversial today is being people don’t want to own emerging market stocks, and so it’s a classic case of the baby being thrown out with the bathwater.

“The same has perhaps happened with investors who dislike Amazon. The mistake we think investors are making here is underestimating the duration of e-commerce trend and the scale of the transformation.”

 

Over five years, Orbis Global Equity has outperformed its average peer and benchmark by 43.59 and 27.87 percentage points respectively with a total return of 122.6 per cent.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Over the same time frame, the multi-asset Orbis Global Equity Balanced fund has outperformed its average peer in the IA Mixed Investment 40-85% Shares sector by 34.82 percentage points with a 82.34 per cent total return.

Neither funds have ongoing charges but do charge a performance fee, as detailed here.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.