&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-688402786&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/688402786/960×0.jpg?fit=scale&q; data-height=&q;608&q; data-width=&q;960&q;&g; Photo by Paul Marotta/Getty Images
Not toast, but maybe a crumbling corn muffin. A company earning $4.2 billion, quarterly doesn&a;rsquo;t readily disappear. Facebook, ticking in the one-fifties, carries 44 buys, 2 holds and 2 sells with an average price target of $221. So much for group think. To date, no bulls weigh in with a revised earnings model for 2018 &a;ndash; &a;lsquo;19. This is understandable, but still a cowardly posture. Let&a;rsquo;s concede Facebook is now unanalyzable, maybe until yearend.
I just probed Facebook, prepared to average down or up. It&a;rsquo;s now a gut play, nothing more nor less. They shot themselves in the foot and recovery is pure conjecture. But, I like this puzzle better than analyst literature that tries to justify Internet paper selling at 30 times 2019&a;rsquo;s EBITDA.
Facebook could be selling now at 15 times this embracive metric. I&a;rsquo;m assuming no leverage like we&a;rsquo;ve seen from rate hikes for advertising, but its base holds together. The R&a;amp;D budget hangs tough, but headcount from new hires eases off. This is horseback analysis, but what else can you do? I can&a;rsquo;t creep into Zuckerberg&a;rsquo;s head.
Then, I focused on the expense column. R&a;amp;D as a percentage of revenue rose nearly 20% in 2017, closer to 15% in the 4&l;sup&g;th&l;/sup&g; quarter. Year-over-year 4&l;sup&g;th&l;/sup&g; quarter operating income advanced over 60%. Give &a;lsquo;em credit for what I call the investment spend to renew yourself. Share based compensation ran at 20% of earnings. This is my cut-off point for deciding whether management operates for shareholders or themselves.
When I doubled back onto Facebook&a;rsquo;s December quarter, advertising revenues rose a snappy 49%. Let&a;rsquo;s flatten it going forward. Forget about rate bumps. Operating income did rise 61% and income tax was at a polite 43% rate. Headcount rose 47% year-over-year. This is the heady growth stuff that made FB a great stock past years, propelling it into the top rung of S&a;amp;P 500 market capitalizations. This even after its $50 billion give back week.
Oracle, too, dropped a snappy 10%, when management conceded its cloud computer sector was somewhat of a disappointment. Or, in Bank of America&a;rsquo;s analyst phraseology, &a;ldquo;Oracle is no longer our top pick in our mean reversion theme in 2018.&a;rdquo; (What in hell does that mean?)
Oracle, a golden oldie in tech, now sells near 15 times projected earnings for fiscal 2018, about a 20% discount to the S&a;amp;P 500 Index&a;rsquo;s numbers. As far as I can tell, the analyst consensus liked Oracle. It exhibited a good chart, rising from low forties to mid-fifties past 12 months. Then the bombshell quarterly report. The new analyst consensus shifted overnight from overweighted to neutral. A handful of diehards like it now on reasonable valuation. This is Stupidsville.
Precariousness of price stability for even the broadest based capitalization stock lays at the feet of institutional ownership. Near term, the investment consensus on specific issues determines stock prices. Almost every major corporation in the country has from half to three-quarters of its shares controlled by professional investors.
At the first whiff of fish, players bang out the goods and go on to something else. My latest reading of the 13F reports for high metabolic operators showed turnover approaching 100%, quarterly. Even more staid investment management organizations show near 100% turnover, annualized. Too few Buffetts.
The investment dilemma can be stated another way. If the biggest and adequately capitalized corporation can&a;rsquo;t deliver a consistently high return for any 5-year period in recent history, you better own them only when profit margins are ready to reaccelerate. (Probably today&a;rsquo;s case.)
This cycle, I believe in the earnings momentum school of money management because I see operating profit margins expanding in a setting of GDP momentum moving off 2% to 3%. The consensus, frequently burned, still hangs in at 2% growth.
It pays to know what you&a;rsquo;re working with. Most large capitalization stocks carry no dreams attached to them except in the minds of institutional investors who rely on their capacity to project earnings better than competition. But, the record suggests no one does this consistently.&l;strong&g;&l;em&g;&a;nbsp;&l;/em&g;&l;/strong&g;
There are hundreds of respectable stocks that probably remain locked in a narrow trading range. Not more ample than 20% for years to come. I&a;rsquo;m talking about paper like ExxonMobil, Coca-Cola, Pfizer, Costco and Procter &a;amp; Gamble. Even AT&a;amp;T and General Motors which I own because I see the analyst consensus as too pessimistic. No value added projecting numbers for Deere, Caterpillar, Honeywell International and United Technologies. I do read extracts of their presentations to analysts, but just to stay abreast.
If well-heeled corporations can&a;rsquo;t make more than 13% or 14% returns on equity, why not buy a bunch of Persian rugs and stash them in a warehouse for 10 years? Well, if inflation remains low, 2%, even 3%, collectibles won&a;rsquo;t appreciate more than the inflation rate. To hell with Sarouks. You&a;rsquo;ve made an inflation and interest rate forecast while reducing your liquidity.
So owning &a;ldquo;safe&a;rdquo; big cap stocks similarly embraces a low inflation and interest rate forecast. If inflation exceeds 3%, 10-year Treasuries push to a 4% yield, and there&a;rsquo;s pressure on the market&a;rsquo;s earnings multiplier. Hard to justify a price-earnings ratio of 18. Fifteen more likely. Even investing in polite paper caries risk of 10% to 15%. I&a;rsquo;m not smart enough to see 30-year Treasuries yielding 4%, so I hang in with high yield BB debentures. This paper outperforms the S&a;amp;P 500, year-to-date.
Why be hung for a sheep? Owning an index fund won&a;rsquo;t serve you. Rather, I&a;rsquo;d still risk my money on the NASDAQ 100 Index. At least there&a;rsquo;s a fair chance of landing on the moon. This index rose 35% last year and put to bed the S&a;amp;P 500.
Consider: Amazon and Alibaba don&a;rsquo;t face the regulatory risk of Alphabet and Facebook. There are no major distribution issues facing them, just competitive forces where they maintain primacy. Amazon rapidly closes in on Apple, challenging it for &l;em&g;numero uno&l;/em&g; in the S&a;amp;P 500 listing. The irony is analysts readily map Apple&a;rsquo;s fundamentals and it sells at an earnings multiplier below the S&a;amp;P 500.
Amazon, aside from breaking out earnings on cloud computing, (now that they&a;rsquo;re sizable) can&a;rsquo;t be modeled on its retail sales here and abroad. They&a;rsquo;re still lowballing price points for market share and could go on another 5 years. Those who project Walmart equivalent margins a few years out skate on thin ice.
I crave volatility, when you go against the grain and play anti-consensus paper. But, you gotta be right or look foolish. Added to my MLPs with Williams Companies, Enterprise Products Partners, even Energy Transfer Equity and Plains GP Holdings. Because I see extended higher market volatility, plus more underwriting activity, I&a;rsquo;ve gone beyond banks to Morgan Stanley for its earnings leverage and below market valuation.
Keep in mind that the years when the S&a;amp;P 500&a;rsquo;s price appreciation is lower than cash equivalents, no more than 10% or 15% of the index outperforms cash. You won&a;rsquo;t win unless you stand alone like a chess master.
The last thing you want to own today is an entrenched company with good management selling at a premium to the market. The reciprocal to all this is everything reverts to its mean – before too long. Good stocks are normally cheap stocks or companies with explosive earnings that defy methodical plotting and surprise you. When Facebook took its dive, I bought more Amazon. Wish me luck and &l;em&g;pesetas&l;/em&g;.
Past 50 years, few corporations in the world have shown Facebook&a;rsquo;s kind of growth trajectory stretching a decade or longer. Polaroid and Xerox are comparable but look what happened later? Xerox was bypassed by the Internet and fax machine while Dr. Land became befuddled by Japanese 35mm cameras and 2-hour photo finishing labs. Never to come back.
Zuckerberg, in his early days at Facebook, was asked why people would hand over personal information to him. He answered, &a;ldquo;They trust me – dumb f*#^s.&a;rdquo; Eerily, the Street is not rushing into commentary on Facebook&a;rsquo;s future or even present valuation.&l;strong&g;&l;em&g;&a;nbsp;&l;/em&g;&l;/strong&g;
&l;strong&g;&l;em&g;Sosnoff and his managed accounts own:&l;/em&g;&l;/strong&g;&l;strong&g;&l;em&g; Facebook, Bank of America, AT&a;amp;T, General Motors, Amazon, Alibaba, Alphabet, Williams Companies, Enterprise Products Partners, Energy Transfer Equity, Plains GP Holdings and Morgan Stanley.&l;strong&g;&l;em&g;&a;nbsp;&l;/em&g;&l;/strong&g;&l;/em&g;&l;/strong&g;