Several years ago, Chipotle Mexican Grill (CMG) was the darling of Wall Street. The company could do no wrong and the stock was priced at extraordinarily high multiples as growth remained unabated. Then the company ran into a series of food health issues from which the company never recovered. Neither did the stock. The reason is that management did not know how to respond, and was; as I like to say, “deer caught in the headlights.”
Now Facebook (FB) is facing the same issue. I have been following FB ever since its IPO (initial public offering). The IPO looked to be a hot issue but then Morgan Stanley (MS) was having trouble placing stock. I got a call from MS offering me more stock than I originally put in for. That was a bad sign. Since the public though that FB was going to be a 1990s style IPO, I gladly took the extra stock. It was an opportunistic play that a seasoned Wall Street veteran could navigate. I also placed orders to sell that stock on the market open. The IPO was a bust, but I sold the stock at a greater price than the offering that very same day. FB stock headed downhill from there. The next trick was to short the stock and wait for the stock to wash out, which it did.
The reason for the poor IPO and decline in the stock price was many fold. However, one of the reasons was that Mark Zuckerberg, the founder and CEO was just too immature to manage a public company. Even though FB brought in Sheryl Sandberg as COO which helped to boost the company’s reputation while Zuckerberg worked on expanding revenues through mobile advertising, the IPO had issues.
Recall that Google (GOOG / GOOGL), now Alphabet brought in Eric Schmidt in 2001 as the company needed a seasoned business manager and frankly an adult to help the company mature and grow. That was a wise move. Alphabet has its own issues with privacy but seems more ready, wiling and able to tackle those challenges.
Eventually, I bought FB stock personally and for clients in the $60s when the company and stock began to rebound. The stock had a nice run. However, last year, it began to get a bit pricey. Then came problems with social media vis a vis the 2016 US elections for which FB management stuck their head in the sand rather than tackle the problem head on. The company and management lost credibility with the investing public and users. I sold about 1/3 of positions last year and then again another 1/3 early this year. The stock was then already beginning to top out.
Over the weekend, news broke that FB was the subject of a security breach. Company management did not respond appropriately, rather kept its head in the sand, which is what they seem adept at doing. Even Sandberg (no pun intended), the designated adult at FB, could not come to the rescue. FB stock fell about 7% on Monday. I sold a little more stock such that we now have about 20% of our position at the height of our holding. It declined another 2.5% on Tuesday. The stock is beginning to suffer from the same pricing compression as did CMG when its management failed to respond to its crisis. At this point, the position we hold in FB is so small that we can just sit on it.
When it comes to managing corporate crises, the gold standard is how Johnson & Johnson (JNJ) handled the Tylenol cyanide poising episode back in the 1980s. That is a fantastic case study which I have included in my Business and Government course at Seton Hall University. CMG and FB failed in that regard to risk management; for which I can now incorporate into the case study lecture.
Today is the end of the March FOMC meeting. There is a high likelihood that we will get another 25-basis point tightening. In fact, the futures market is pricing in a tightening with 100% certainty.
There is another storm headed to the Northeast. If you are there, stay safe and warm. Here in the Las Vegas area, we expect some much needed rain on Thursday, but will top out in the low 70s. That’s all for the LakeView weather report. I will check back in one more time with another My Gut Feeling before the holidays and end of the 1st quarter next week.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long FB , GOOG, GOOGL & JNJ — although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant, beverage and agricultural stocks. An individual subscription to the newsletter can be ordered at www.restaurantstox.com Furthermore; Scott is also a professor at the Seton Hall Stillman School of Business in South Orange, NJ.
– Read Scott’s intra-day thoughts and comments on Scutify for which he is a co-founder of its parent company Wall Street All-Stars, LLC
– You can email Scott at firstname.lastname@example.org
© 2018 LakeView Asset Management, LLC. All rights reserved.