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Applying the avoid the Human Factor Strategy to Facebook

Can the social media company deliver the growth implied by its  share price?

Facebook is a company with an interesting pedigree. Computer whizkid Mark Zuckerberg created a social media platform that seems to be on everybody’s device. My 15-year-old son keeps asking me why I use Facebook, I respond to him that I use Facebook because “everybody is on Facebook!” His response to me is something along the lines of “No dad, just you boomers are on Facebook!”.

As a business though, Facebook is a phenomenal company, it is a worldwide brand, and it is one of the “FANMAGS” (Facebook, Amazon, Netflix, Apple, Google) which influence the direction of the tech-heavy NASDAQ index.

BUT here at Global & Local Asset Management, we look at shares in a different way. We employ the “Avoid the Human Factor” strategy developed by our New York-based friends at New Age Alpha LLC.

“Avoid the Human Factor” looks at investing in shares that have a high probability of being able to deliver the growth implied by its share price. The probability is calculated by using actuarial techniques which are applied to portfolio management. New Age Alpha uses the only two things we know about a share, the current share price, and the profitability of the company as reported in its financial statements.

Quite recently, on April 15, New Age Alpha posted an interesting article on Facebook (the company, not the social media platform) on the New Age Alpha website (www.newagealpha.com).

New Age Alpha found the performance of Facebook’s shares on the market to be quite different to others during the pandemic, in that there are some companies that were hurt by the pandemic (airlines companies’ shares as an example) and others who benefitted from the pandemic, such as Netflix. However, Facebook seemed to exist in its own little habitat, and this is apart from being in the news for all the wrong reasons pre-Covid. The share seemed to shake off all the bad press and then during the pandemic, Facebook seemed to simply keep growing!

New Age Alpha reported in their article the risk of human behaviour in the share price is very evident, the question on Facebook shares went from “Is Facebook a good investment?” to “How good of an investment is Facebook?” The Human Factor Score may have the answer.

As previously mentioned, the Human Factor Score measures the probability that a company will fail to deliver the growth implied by its  share price. This may be caused by investors interpreting vague and ambiguous information in a systematically incorrect way. In Facebook’s case, in which the share price only went higher, could human behaviour have driven the price too high?

I found the following points made by New Age Alpha the most inciteful:

“Human Behavior’s Impact on Facebook

  • From the beginning of 2013 to today, Facebook rose from approximately $30 per share to approximately $300, and the only two major corrections occurred side-by-side with the overall market swoons of December 2018 and March of 2020. In fact, in a very general sense, its rise tracked that of the S&P 500.
  • Some contend that such similarities with the S&P 500 are too close, however. A growing chorus of people contends that the FANMAGs have taken on an outsized portion at the top of it and fear that a bust in any of those specific companies might create a similar outsized impact in the Market Cap-Weighted Index. It’s a concern…yet a concern borne of human behaviour impacting a stock price.
  • At New Age Alpha, we seek to avoid the losers by using an actuarial approach similar to that used by the insurance industry. Put simply, we avoid vague and ambiguous information. As of April 8, 2021, based upon Facebook’s stock price and strictly the known financial information (financial statements, etc.), we believe there is a 33.8% chance that Facebook will fail to deliver the growth implied by its stock price.
  • With a Human Factor of 33.8%, we believe that Facebook appears likely to deliver the growth implied by its stock price, but some caution may be prudent. Remember, the lower the Human Factor the more likely vague and ambiguous information has NOT been priced into the stock.”

If you wish to read the full article by New Age Alpha on Facebook and other global stocks, visit their website.

I look forward to speaking to you all again soon.

Disclosures

Past performance is not indicative of future results. Current and future results may be lower or higher than those shown. An investor utilizing the Human Factor may experience a loss. No investor or prospective investor should assume that any information presented in this article serves as the receipt of, or a substitute for, personalized individual advice from Global & Local Asset Management (Pty) Ltd   New Age Alpha.

The accuracy of the Human Factor is materially reliant on the integrity of the information utilized in the calculations, including any assumptions and or interpretations made by the user about the data. Data discrepancies, and user assumptions, can all contribute to differing outcomes. The underlying assumptions and processes presented herein are subject to change. Global & Local Asset Management and New Age Alpha reserves the right, in its sole discretion, without any obligation and without any notice, to modify the information contained in this material, or to correct any errors or omissions in any portion of this material at any time.

The above statements are not an endorsement of any company or a recommendation to buy, sell or hold any particular security. Investors are urged to consult with their financial advisors before buying or selling any securities. The views stated herein are only current through the date stated and are subject to change at any time based on market or other conditions.

ADVISOR PROFILE

Mauro Forlin

Global & Local Asset Management

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