FAANG analysis with hedge fund guru Jean-Pierre Verster

Protea Capital Management founder Jean-Pierre Verster shares his insight on the US stock market, with a specific focus on the tech titans. The turbulent market has turned Mr Market into a maniac, with some of the world’s largest businesses – Netflix, Facebook and Amazon – all subject to near 20% intraday moves following earnings announcements. Jean-Pierre also takes a deep dive into the valuations of these businesses and whether the current sell-off has provided some decent entry points in good businesses. – Justin Rowe-Roberts

Jean-Pierre on his global fund’s start to the year

Unfortunately, it’s been a disappointing start to the year, not just for equity investors in general, but also for us and the Protea global fund. It is a hedge fund, which means we do have the tools to short shares. It is there to use to predict when markets fall and is what has happened so far in January and the first week of February. What we typically like to do is to hold high-quality companies on the long side. We benefit when the share prices rise and we are short on what we call mediocre companies. The pain you’ve seen in the last month has not been with mediocre companies. The pain has been in high-growth companies that are still great; they still expected to grow their earnings at above inflation but they just got too expensive. Unfortunately, we were effectively short the wrong shares in the short term, and therefore our funds fell more or less in line with the indices. In dollar terms, roughly 5%; in rand terms, roughly 9%. While the MSCI World was also down 8.5%. We’ve, unfortunately, done in line with the market in the short term but we think, over time, a mediocre company stays mediocre and it will come right. But it has been a disappointing start to the year.

On wild intraday moves for the large mega-cap stocks

That is why I’m scratching my head. I would add another name to the mix and that is Amazon. It was down sharply last month and all of a sudden today – on results that came out in the last 24 hours, which looked okay, combined with an announcement that they will increase their prime membership subscription rate – the shares went up like 17% after hours. So, you have 24% drops in the case of Meta. You have 17% rises in the case of Amazon. It is unbelievable. I don’t quite know why these mega-caps are trading like micro-caps, as you correctly put it. Because these days, everyone has access to so much information and with Big Data, alternative data, you know, people do web scraping. They do a Google trend analysis to see what the results will be like before a company announces. Will it be above or below expectation? So, it is unbelievable that the results released are so far from the market expectations. I don’t like to know what it means. The only thing I can think of is we’ve got so much retail participation, so much hot money, that the expectation was not correctly priced by those market participants and it has caused these big moves where results are jumping.

On whether there is more pain to come

We run individual company models on almost 10,000 companies internationally. For the last year, our models have been screaming that most US shares are overvalued. But it’s amazing the speed at which things have changed in the last month. It’s something like over half of Nasdaq constituents are down more than 50% the last few months. That is unbelievable. And you don’t see that in the index table because the biggest companies – excluding Facebook or Meta – have not fallen as much as the smaller companies. Notwithstanding that you don’t see the pain at the index level, you see them in individual stocks as share prices have come down so much. I believe there could be pain but most of it is behind us; we are actually starting to buy a lot of opportunities. I am hoping we are near the end of this difficult period.

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