Earnings seasons can be volatile. Stock traders love it as an opportunity to position for an earnings beat. And when companies report an unexpectedly terrible miss, it can leave many investors holding the bag. This is what happened to an unsuspecting market on Wednesday when Facebook unexpectedly reported an earnings miss, and lowered guidance. The stock plunged nearly 19% on the day, and dragged growth fund managers disproportionately down with it (see chart below for the Facebook and total Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) exposure).
Facebook is a prominent growth stock, widely held across active managers. Many investors turn to the growth category of the style box to help harness market trends, participate in positive investor sentiment, and seek financially stronger companies…those worth paying more for. A factor lens can help determine which stocks are worthy of a higher premium.
Momentum strategies track price trends, a measure of investor sentiment. Many breakout stocks across a variety of industries have earned exceptional returns over the last 6 to 12 months–the time frame generally employed by momentum strategies like the iShares Edge MSCI USA Momentum ETF (MTUM). Investors have seemingly been more skeptical of Facebook’s forward-looking prospects post privacy scandal, and while the stock earned positive returns in the first half of the year it lagged many of the truly breakout names that dominated market returns in 2018. As a result, MTUM[2] has no exposure to the stock.
For investors looking for exposure based on financial strength, or quality, factor strategies may screen on popular metrics like Return on Equity (ROE), Earnings Consistency, and leverage. Once again, even though it has low amounts of debt, Facebook doesn’t hit the mark relative to its peers in terms of consistency of earnings and ROE, and the iShares Edge MSCI USA Quality ETF (QUAL) has no holdings in FB as a result.
Factor investing takes a view towards the long-game in investing.
Momentum price trends play out over months, not days or weeks. And the strength of a company’s balance sheet is proven out over years, not one earnings report. Nevertheless, earnings season provides an opportunity for investors to take stock. It provides another data point around the consistency or inconsistency of a company’s ability to deliver earnings to its shareholders. It provides another look at investor sentiment in a stock, and a company’s forward-looking prospects. A factor lens can help to cut through the noise to find those stocks deserving of your confidence.
For a complete list of holdings for the iShares Edge MSCI USA Momentum Factor ETF click here.
For a complete list of holdings for the iShares Edge MSCI USA Quality Factor ETF click here.
Build on insight by BlackRock, written by Martin Small, Head of U.S. iShares.
