Facebook: a value trap ready to sucker punch investors

The value rally is in full swing, but pitfalls lie in wait. Lauren Almeida reports

Volatile stock markets have unleashed bargain hunters, but experts have warned DIY investors about falling into “value traps” that are ready to snare.

The S&P 500, an index that tracks the US stock market, has been flat over the past six months following a bumper decade, mainly due to its heavy reliance on speculative technology stocks. Share prices have buckled under the pressure of rising interest rates, which reduce the value of future profits.

Big drops across the market have sparked the attention of investors looking for a bargain. Meta, formerly known as Facebook, was the most popular stock for users of Freetrade, a broker, this week. Its share price has plunged more than 30pc in February after it reported weaker-thanexpected profits.

Stephen Yiu, manager of the he technology- focused Blue Whale Growth fund, said the largest US tech companies now w looked like so- called value traps. aps. These are stocks whose share e prices look cheap, but the fundamentals ntals are worse than they seem: the companies mpanies are cheap for a reason and primed d to fall further.

“Valuations look enticing, but businesses are deteriorating,” he said. “Meta is one of these.”

Mr Yiu sold his stake in Meta in January, before the earnings report. “The share price is down, but the company’s fundamentals are getting worse. Its advertising business has suffered and there is increased competition from the likes of [video-focused social network] TikTok.”

In the UK, the market has rallied as global investors swap their penchant for new-fangled tech stocks for reliable profits. Value stocks, traditionally older industries such as banking, mining and oil and gas, are now beating their “growth” counterparts. The former dominate the FTSE 100, a benchmark of London’s largest companies. Such shares look more appealing when interest rates rise as they deliver profits in the present and pay dividends that grow with inflation.

Despite a 6pc rise in six months, the UK market was still housing value traps, fund managers warned.

While there was opportunity for DIY investors to make big gains on cheap shares, plenty were primed to fall, according to Alessandro Dicorrado, of the Ninety One UK Special Situations fund.

“Asos is one,” he said. “That is not to say it is worth zero, but it has less of a competitive advantage than we thought. There are so many multibrand online retailers that do their own shipping, but the profit margins are very small. Plus there is more competition from China.” Shares in Asos have fallen 63pc in the past year.

Alex Wright, of Fidelity Special Situations, a value fund, warned that miners such as Rio Tinto, Anglo American and Antofagasta were traps.

“Most value fund managers own mining stocks because they look very cheap on a price-to- earnings basis,” he said, pointing to a metric that indicates how expensive a stock is relative to its profits. “But their earnings are very high because metal prices are, which won’t last forever. Profits will fall in 2022. This will end up damaging returns from the whole UK market because miners are such a big influence on the FTSE index. While these stocks look cheap at the moment, we don’t like the underlying investment case.”

However, Mr Dicorrado said housebuilders builder were cheap shares primed grow, singling out Taylor Wimpey. “Builders used to have a lot of debt eating into cash flow, but now they have much healthier balance balanc sheets and more flexible regulation – they are good businesses that are not no expensive.”

Retailer il Marks and Spencer was Mr Wright’s bet. Shares had recovered 37pc in the past year but are still 39pc below where they traded five years ago. It is also cheaper than rivals on a priceto-earnings basis.

“The new managers have improved its clothing business,” he said. “It has grown significantly too because competitors such as Debenhams fell over during the pandemic. But the food business is the biggest driver because the market share is so low. There is significant scope for growth.”

Mr Wright also highlighted Kingfisher, which owns DIY retailer B&Q. “The new boss stopped a disastrous programme in which the company tried to make own-brand products,” he said. “It has had to deal with a lot of inflation in the product mix, but it has been able to pass this on to its customers, proving the strong pricing power.”

Derek Stuart, of the Artemis UK Special Situations fund, said some of London’s biggest companies were compelling opportunities, despite the number of traps around, such as oil giant BP.

“It has benefitted from rising oil prices, but it generates so much cash it is able to invest in the new era of energy, such as hydrogen and wind farms,” he said. “BP is central to the transition towards a greener future.”

He also tipped Imperial Brands, the tobacco giant. It has lost half of its market value in the past five years but the share price has grown 19pc since 2021.

George Godber, of the Polar Capital UK Value Opportunities fund, said British shares were still cheap across the board. “The London market has been cheap relative to other countries since Brexit. This is now a source of opportunity for DIY investors.”

In the US, Mr Yiu warned Paypal, the online payments giant, was a value trap. “There is uncertainty around the management team,” he said. “The chief executive, Dan Schulman, is now 64 and has been running the company for eight years. But the shares have returned less than the Nasdaq index, which tracks the country’s biggest technology companies. There is a chance that he will retire, or be forced into retirement, and we have not seen any succession planning.”

More positively, analysts at Jefferies, a broker, said sportswear brand Nike was a good and reasonably priced bet. The company had been unfairly punished, they said, with the share price down a fifth since November.

Investors were underestimating the positive impact of its new direct distribution plan, they said. “As supply chain issues wane and factories are open for longer, Nike will be able to increase the number of sneaker releases and get products out quicker,” the analysts added.