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Bram de Haas
Bram de Haas
Articles (284)  | Author's Website |

Nygren: Buying Facebook, Selling JPMorgan. Why?

A discussion of Oakmark's new pick and the sale of this banking giant

April 13, 2018 | About:

Bill Nygren (Trades, Portfolio) appeared on CNBC Thursday to discuss some of the Oakmark Funds' holdings. Two holdings he specifically talked about at some length were Facebook (NASDAQ:FB) and JPMorgan (NYSE:JPM).

Interestingly, the former has been in the news all week with CEO Mark Zuckerberg appearing at a congressional hearing and JPMorgan’s star CEO, Jamie Dimon, released a lengthy annual letter. While Facebook is involved in a data scandal surrounding Cambridge Analytica's, JPMorgan is celebrated for its top performance and Dimon is viewed as a best-in-class CEO.

Not surprisingly, Oakmark is buying Facebook and sold JPMorgan.

That's what value investing is all about, right?

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Facebook

Nygren's explanation for owning Facebook was fairly simple. Facebook has always been valued at a high multiple. The question is whether it is that much of an above-average company to deserve it. According to Nygren, if you do a cash-adjusted forward price-earnings multiple, Facebook is trading at very average price-earnings multiple.

Facebook currently trades at around 30 times earnings and at about 22.5 times forward earnings. I didn't adjust the multiples, but the company actually does not have that much cash.

I think there are few people who would argue Facebook is not an above-average company. It is practically the textbook example of a network effect.

The caveats I do have, and why I won't be putting in buy orders today, are Facebook's earnings could grow a little bit slower than expected due to the company having to dial back advertising load and a slew of upcoming regulation that isn't yet accounted for in earnings estimates.

My second caveat is the market is overheated to begin with. Facebook being an OK buy amid a pool of crap isn't exactly what I'm looking for.

Nygren may be less worried about advertising load because it would not surprise him if Facebook starts charging subscription prices in the future.

JPMorgan

While Nygren sold JPMorgan, he was quick to emphasize they still own a lot of financials. They own Citigroup (NYSE:C) and Bank of America (NYSE:BAC), for example. Nygren acknowledges Dimon is a star CEO, but the bank is firing on all cylinders. JPMorgan is being viewed as far superior to the other major banks. Citigroup and Bank of America are indeed trading with the lowest price-book ratios among the major banks:

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Oakmark is also careful to look at sustainable earnings, so Nygren may be suggesting not all of JPMorgan's earnings are sustainable at this level. On the other hand, the firm observes improvements are possible at Citigroup and Bank of America, which the market is skeptical about.

I won't be shorting JPMorgan anytime soon, but these are interesting points from this experienced fund manager nonetheless.

Disclosure: No positions.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website


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