By David Randall
NEW YORK (Reuters) - Facebook Inc's (O:FB) losses are becoming other companies' gains.
Concerns about the social media giant's declining profit margins and battered reputation have prompted 93 U.S. mutual funds to completely sell out of their positions in the company so far this year, exacerbating a roughly 35 percent decline in Facebook's share price from its highs, according to Refinitiv’s Lipper research service.
The selling by fund firms including Fidelity Investments, The Hartford and Putnam Investments combined for a total of nearly 12 million shares, and came amid similar moves to liquidate positions in the company by prominent growth-focused hedge funds. Jana Partners and Third Point LLC, for instance, together sold nearly 3.7 million Facebook shares in the third quarter, according to securities filings.
Funds that have dumped Facebook, whose shares helped lead the broad U.S. market higher the last two years, are now favoring investments ranging from payments companies like Visa Inc (N:V) and Worldpay Inc (N:WP) to consumer companies including PepsiCo Inc (O:PEP) and Chef's Warehouse Inc (O:CHEF) because they expect the troubles at the social media company to continue as it leaves its era of rapid growth behind.
Facebook was rocked by disclosures earlier this year that the personal information of up to 87 million users may have been improperly shares with political consultancy Cambridge Analytica.
"The revelations in the first quarter of 2018 about data privacy issues and the growing global concerns about data security and the potential for increased regulation made it challenging to handicap the required investments to remedy some of these issues, which we anticipated would weigh meaningfully on earnings growth in coming quarters," said Jim Hamel, portfolio manager of the Artisan Global Opportunities Fund (O:ARTRX).
Hamel's fund, which liquidated its position in May, reaped a nearly 400 percent gain on Facebook after buying during its initial public offering in May 2012, which was priced at $38 a share. Hamel said he has used the gains to add to positions in the fast-growing global digital payments industry such as Worldpay, whose shares are up 12 percent for the year to date.
Greg Woodard, managing director at Manning & Napier, said his firm, which began buying Facebook in November 2012 at around $20 per share, sold all its Facebook shares this year as part of a broad move away from cyclical technology companies.
Facebook's "most recent guidance really substantiated the margin contraction that we had started to worry about, and when we looked at the price and our future growth expectations they didn't match up with what the market was forecasting," he said.
Woodard said his firm has added positions in software developer EPam Systems Inc (N:EPAM) and global beverage company PepsiCo, and has been adding to its position in Amazon.com Inc (O:AMZN) on dips.
"BROKEN" STOCK?
While Facebook is now trading at a more compelling valuation following the steep declines in its share price, questions about its ability to maintain and accelerate its growth rate may leave Facebook in a no-man's land between a growth stock that appeals to investors focused on rapid expansion and a value stock that appeals to investors looking for companies that trade at a discount or offer attractive dividends.
"Once a company gets put into the penalty box by a growth investor it's hard to get out," said Todd Rosenbluth, director of mutual fund research at independent research firm CFRA. "When a stock is perceived as a broken growth stock it loses its appeal, whereas a declining stock price for a value stock can often make it more appealing."
Woodard, the Manning & Napier fund manager, said his firm would not purchase shares of Facebook again in its growth strategies, and instead would put the company into a fund that focuses on "companies that need to fix themselves" if he were to buy it again.
For that to happen, Facebook's stock price would need to be "significantly lower," he said. "The gap is not worth putting a number on it."