investing

Why Google and Facebook Get No Love from the Big Money

Neither company has been particularly friendly to dividend investors. And managers and activists know their votes hardly matter.

Big institutional money managers tend to be the conventional sort, though I’m not talking about their blue power suits or country club memberships. I’m talking about their stock holdings. Managers tend to pile into the same set of large, mega-cap stocks because deviating from the crowd comes with major career risk.

Let me explain. Running a mutual fund is a fantastic, high-paying job, but it is also a precarious one. The fund’s success — and thus the manager’s paycheck — is directly tied to its assets under management. This creates tremendous pressure to conform to a benchmark, which is often the S&P 500.

A manager’s thinking goes like this: If I bet big and beat the benchmark by going outside the mainstream, my investors are happy…for a day or two. But if I bet big and lose, I might be out of a job.

So, the result is that most managers become closet indexers who overweight a handful of stocks and hope to beat the market by a percent or two.

Imagine how surprised I was when I saw this chart in the Financial Times, which tracks institutional ownership of nine major tech companies. (Google makes the list twice, so it’s ten stocks but just nine companies.)

The large overweightings in Expedia (EXPE) and Trip Advisor (TRIP) aren’t that surprising. Expedia and Trip Advisor account for just 0.059% and 0.054% of the S&P 500, respectively, so even a small amount of institutional buying will put these stocks out of proportion to the rest. And the overweighting of Netflix (NFLX) is also pretty understandable given that it is one of the best performing stocks in the S&P 500 this year. It’s near the tail end of the chart that the numbers get interesting.

Two of the biggest names in tech — Facebook (FB) and Google (GOOGL) — are massively underowned by institutional investors relative to what their weightings in the S&P 500. And where it gets even stranger, institutional ownership of the less favorable of Google’s two traded share classes — the non-voting Class C shares (GOOG) — is “where it should be” relative to its weighting in the S&P 500. It’s the A shares (GOOGL), which actually have voting rights, that are underowned.

What’s going on here? Why are big money investors shunning Facebook and Google? Let’s look at Google first. There are two issues: The discrepancy between the share classes and the overall underweighting of Google stock by institutional investors. The latter is the easier of the two to explain. Managers don’t care about the lack of voting rights because they know their votes hardly matter. For would-be activists or corporate raiders, Google is an unassailable company. Its founders hold non-traded “super voting” class B shares that make any sort of proxy battle a virtual impossibility. GOOG’s consistent discount to GOOGL, which has actually widened recently, really makes no sense in this context, so it’s perfectly logical for an institutional manager to overweight the cheaper GOOG relative to GOOGL.

Thinkstock

As for the issue of Google being underweighted overall… well, it might come back to that point I made about Google being unassailable. Google is not known for being particularly friendly to its shareholders (see my blog post Hey Google, Stop Being Such a Baby and Pay a Dividend.) Google is a profitable company that mints money, yet it has developed a reputation for being the plaything of its founders rather than a profit-maximizing business.

The same goes for Facebook. Zuckerberg is a ruthless competitor and one of the few people that seems to know how to actually make money in social media. Yet, Facebook has also burned through shareholder money on expensive acquisitions of dubious economic value (Oculus, Whatsapp, etc.) and expenses grew at twice the rate of revenues last quarter. Is there a trade here?

Maybe. While I don’t see an immediate catalyst to change big money minds (neither Google nor Facebook will be paying a dividend anytime soon… sigh…), you could view the underownership as a contrarian value signal.

The safest move, however, might be a pair trade. Short GOOGL and go long GOOG, and eke out an arbitrage profit as the discount closes.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

About the Author

Charles Lewis Sizemore

Chief Investment Officer, Sizemore Capital Managaement LLC

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.

Most Popular

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space
Budgeting

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space

In this hot real estate market, consider the costs of buying and selling a house along with the expenses associated with your new digs.
November 13, 2020
What Biden Will Do: 24 Policy Plays to Expect From the Next Administration
Politics

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration

The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
November 19, 2020
The 13 Best Healthcare Stocks to Buy for 2021
Kiplinger's Investing Outlook

The 13 Best Healthcare Stocks to Buy for 2021

Most of the best healthcare stocks for 2021 will have some sort of ties to COVID, whether it's producing a vaccine or cure, or benefiting from the vir…
November 20, 2020

Recommended

13 Dividend Stocks That Have Paid Investors for 100+ Years
stocks

13 Dividend Stocks That Have Paid Investors for 100+ Years

Here are 13 dividend stocks that each boast a rich history of uninterrupted payouts to shareholders that stretch back at least a century.
May 21, 2020
Kiplinger's Weekly Earnings Calendar
stocks

Kiplinger's Weekly Earnings Calendar

Check out our earnings calendar for the upcoming week, as well as our previews of the more noteworthy reports.
November 27, 2020
11 High-Yield REITs for Big Income
Investing for Income

11 High-Yield REITs for Big Income

The old '4% rule' has recently crept up to be the '5% rule.' This collection of high-yield REITs can still help you reach that threshold in pure incom…
November 20, 2020
10 Stocks Warren Buffett Is Buying (And 11 He's Selling)
stocks

10 Stocks Warren Buffett Is Buying (And 11 He's Selling)

Berkshire Hathaway's chief continued his purge of bank stocks during the third quarter, but Warren Buffett also added six brand-new positions.
November 17, 2020