- Famed 'bond king' Jeffrey Gundlach has warned investors against investments in 'FANG' stocks.
- He had correctly called a Donald Trump victory in January 2016, when not many were taking the Republican seriously.
- Is this warning a signal to sell Facebook stock?
The so called 'bond king' Jeffrey Gundlach of Doubleline Capital fame, has sounded a warning against investing in the FANG group of stocks, which include Facebook Inc. (NSDQ:FB), Amazon.com (NSDQ:AMZN), Netflix Inc. (NSDQ:NFLX) and Alphabet Inc. (NSDQ:GOOGL). The Doubleline CEO, in an appearance on CNBC's Fast Money Halftime Report last Friday, stated: 'I think the FANGs are a bubble frankly. I think they are all based upon the past which changed on Tuesday (US Presidential Election day)'. The FANG group of stocks have lost 2.75% on average (equal weights) since the results of the election were announced, a stark contrast from the 9.7% average gains posted in the YTD up to Nov 8. FB stock had led the pack with gains of 18.7% in the year upto the election and has now lost 3.6% in the trading sessions following the election. Should FB investors heed the warning and exit the stock? (See also: Has The Trump Victory Created A Buying Opportunity In FB Stock?)
Gundlach: Risky Assets Are In A Lose-Lose Setup
As reported by Fortune, Gundlach also offered two clear points in his theory of betting against the FANG stocks. Claiming that the FANG stocks were trading as a very close proxy for a Hillary presidency, Gundlach stated, 'It’s not a good idea to bet on things that were correlated to the regimes that have been defeated' and also took an issue with the expensive valuations of these stocks. The 'bond king' called these stocks 'risky assets' citing the high valuations, and stated that 'I see a real lose-lose setup for risk assets, and they're incredibly expensive'. Let's now understand these claims in the context of Facebook stock, which had been powering higher not too long ago.
Facebook Under A Donald Trump Presidency
It's true most of Silicon Valley were backing Hillary in the race for the US presidential elections. Now that Donald Trump is set to take White House in January, let's first understand the potential impact of Donald Trump's stated policies on Facebook. Of all the policies of Donald Trump, the ones to impact Facebook would be the issue of H1-B visas, corporate tax rate and repatriation tax. As discussed in our recent post on Google, the effects of Trump's tax policy will be largely beneficial to Facebook, who will benefit from a tax break on repatriation tax and a lower corporate tax rate in the United States.
Moving over to the issue of H1-B visas, Donald Trump's stand on H1-B visas is not frozen in Ice, given the swing in the president-elect's statements on the matter. A post on the WSJ summarizes the president-elect's swinging stance on the issue. Quoting from the WSJ report:
His stance on H-1B permits has changed over time. Early in the year policy statements on his campaign website said the numbers of such visas should not be increased. In a March debate, however, he said he supported highly skilled immigration. But after the debate, he issued a statement vowing to “end forever the use of the H-1B as a cheap labor program.
The stance on the H1-B front is still evolving and it will be interesting to see the final shape the policy regarding the issue of these 'work permits' takes. However, at the moment, it does not have any meaningful impact for Facebook or its shareholders. Hence, selling Facebook on fears of a Trump presidency are unjustified, to say the least. (See also: Why FB Stock Is Overvalued Right Now)
Facebook Stock Will Trade Based On How Well The Company Performs
The bottom line is that Facebook stock, over the long term, will trade based on how the company performs, with or without Trump. As long as the company performs well, the long term trend will be up, even though there will be corrections and pullbacks along the way. As discussed in our recent Facebook post, the company has continued to outperform as far as its fundamentals are concerned. The strong growth in topline/earnings and the recent fall in the stock price on fears, which are speculative at best, has pushed the FB stock to its lowest valuation levels since its IPO. With the company showing no signs of slowing down and trading at a forward PE ratio of 29x, the beaten down FB stock presents an attractive long-term buy in our opinion. Hence, investors with a long-term horizon should continue to pile into the stock at these lower prices.
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