Facebook (FB) was off to a good start in 2019 even before it reported Q4 earnings last week and then jumped over 10% after beating expectations on revenues, earnings and monthly active users. Tony Mitchell, one of my managers, first bought Facebook at $16. At today&s;s price of $169, Tony is still not selling because he sees more upside.&l;/p&g;
&l;strong&g;Ken Kam&l;/strong&g;: Facebook was beaten up pretty badly last year over privacy issues and lost 26.2% in value. Do you think we are past that?
&l;strong&g;Tony Mitchell&l;/strong&g;: For the most part, I do, however, I&a;rsquo;m sure that there will still be issues over privacy, and there will probably be regulations forthcoming, but I don&a;rsquo;t believe they will hold FB back from continuing to be part of the fabric of our lives. FB isn&a;rsquo;t going away anytime soon and the recently reported growth in monthly active users despite all the criticisms over privacy proves that and is turning non-believers into believers.
&l;strong&g;Kam&l;/strong&g;: Your original investment is already worth 10 times what you paid for it. How much more upside do you see?
&l;strong&g;Mitchell&l;/strong&g;: In the last year, I felt like I did when I was buying FB at $16 - $20 when it was popular to say that only old people were using it. The only difference was that in 2018, it was popular to say that everyone would leave FB because they are stealing your data; they are spying on you, etc., etc. If people actually read all the small print contracts they signed every time they opened a new credit card, leased a car, signed up for online banking and a multitude of other things they sign without reading, they would realize that there are worse things that they should worry about.
When TV was in its early years, people were scared that their TV sets were spying on them also. I know that may seem like a stretch, but there is a comparison to be made, more so with the fact that TV has been part of the fabric of our lives for the past 60 - 70 years now, and FB is similar in many ways. They both provide content for our viewing pleasure for only the cost of advertising. FB has many advantages though &a;ndash; one is that it not only provides content to entertain and inform us of what is happening in the world and our communities as TV does, but it also informs us of what is happening in our personal social circles &a;ndash; our families and friends lives, and it lets us interact with many of them instantly with a quick post. With the growth of extended families, more children that move across the country from their families, friends that change jobs and move away more frequently than ever, FaceBook is the glue that keeps your social circles intact.
&l;strong&g;Kam&l;/strong&g;: You said many advantages &a;ndash; are there others that you are factoring in?
&l;strong&g;Mitchell&l;/strong&g;: Yes, Facebook just keeps getting better. Their marketplace is a great way to sell just about anything &a;ndash; I&a;rsquo;ve sold a boat on it, quick, easy, and it doesn&a;rsquo;t cost anything. Groups has been around, but it seems like there are more and more groups that become relevant. I&a;rsquo;m on a plant-based diet, that is very similar to a Vegan diet and so I&a;rsquo;ve joined a Vegan group that provides a lot of great information. I also recently found out that I could share items that I&a;rsquo;ve been saving (like recipes) and the person or persons that I shared it with can add to it. FB is such a useful tool in a busy world -- it is a classic Peter Lynch investment! That is that Lynch had a penchant for investing in businesses that he was intimately familiar with &a;ndash; not as a fund manager, but as a consumer. Then there is also Stories &a;ndash; which FB says is going well.
&l;strong&g;Kam&l;/strong&g;: You have made some great points about the company, but what about the stock &a;ndash; how do you view it fundamentally right now?
&l;strong&g;Mitchell&l;/strong&g;: Fundamentally, it is cheap! FB is trading at a 22 PE ratio on a trailing twelve months basis. This is a growing company with revenue growth of 37%, earnings growth of 40%, advertiser growth, user growth of 9%, and these are all verticals, we haven&a;rsquo;t even touched on the horizontal growth. Also, the Board of Directors just authorized another $9 Billion buyback for 2019, and that can&a;rsquo;t hurt!
&l;strong&g;Kam&l;/strong&g;: &l;a href=&q;https://www.forbes.com/sites/kenkam/2019/01/21/amd-is-top-internet-fund-managers-top-pick-for-2019/&q;&g;We recently talked about AMD&l;/a&g;, and you mentioned using both fundamentals and technical indicators, so what technical indicators do you see for FB here, and by the way, your comments on both AMD and INTC during that conversation seem to be playing out just as you said they would.
&l;strong&g;Mitchell&l;/strong&g;: Yes, it seems like there is some disappointment with Intel naming the CFO as the new permanent CEO, and it is nice to see AMD up 25% in the last week since its earnings report.
Regarding technical indicators for FB, it is bumping up against its 200-day moving average and I think it may be range-bound in the short term. It might pull back in the lower 160s, before heading higher, but I see it grinding higher through the year and I think we may see it back up in the 180s sometime in April.
&l;strong&g;Kam&l;/strong&g;: Are there any other reasons that you like FB so much?
&l;strong&g;Mitchell&l;/strong&g;: Yes, we haven&a;rsquo;t even talked about their other platforms that are currently not contributing much if anything to their revenues and earnings such as Instagram, WhatsApp, and Oculus. FB is wisely integrating these other platforms so that its users can seamlessly login and use them. WhatsApp is adding payments in many countries and FB also expects greater things from &a;ldquo;Watch&a;rdquo;, its live video platform.
&l;strong&g;Kam&l;/strong&g;: So, are you recommending FB as a Buy right now after this early run in 2019?
&l;strong&g;Mitchell&l;/strong&g;: Although Facebook is now up 22% year to date, it is still 24% off of its 52-week high of $218.62.
I think depending on how much FB one currently holds in their portfolio, it could be a buy or a hold, and if you caught it at its recent 52-week bottom of $123.02, I couldn&a;rsquo;t fault anyone for trimming a third of their position, but I&a;rsquo;d hold the other 2/3. If you bought it higher than where it is now, I&a;rsquo;d hold it, and if you have less than 3% of your portfolio in FB, I&a;rsquo;d be a buyer, especially if it dips below $165.
&l;strong&g;My Take&l;/strong&g;: In 2018, Tony Mitchell&s;s Internet fund lost just 0.61% outperforming the S&a;amp;P 500&s;s loss of 4.38% even though many tech stocks like Apple lost 30% or more in the 4th quarter. Many aggressive investors can outperform in a bull market. However, few aggressive investors have been able to beat the S&a;amp;P 500 when the market heads down. In 2019, Tony Mitchell&a;rsquo;s Internet fund is already up 14% year-to-date.
Tony Mitchell&s;s Internet Fund has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Tony averaged 16.92% a year which compares well to the S&a;amp;P 500&s;s 5.62% return for the same period. Over the last 10 years, Tony&a;rsquo;s fund did better than the top U.S. equity mutual fund manager in Morningstar&s;s database.
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