Forget the FANGs. Try the MANGs.
That’s the advice of Rupal Bhansali, CIO and author at Ariel Investments, who spoke about her contrarian value approach at a Midtown Manhattan briefing on Tuesday. Bhansali, author of the recent book Non-Consensus Investing: Being Right When Everybody Else Is Wrong, talked about the state of the markets and what’s going to happen when growth stocks invariably stall out and value likely takes over again.
The FANGs, of course, are Facebook, Amazon, Netflix and Google (and Apple is often thrown into the mix, making it FAANG), which have been market darlings accounting for much of the S&P 500’s success (Apple scored an 86.2% return in 2019, Google almost 30%). According to Bhansali, the companies are for various reasons overcrowded trades that are going to get hurt in a downturn for a variety of reasons investors aren’t looking at. In a nutshell, investors are buying past success for expensive prices, she says.
The MANGs? An assortment of unloved contrarian plays Bhansali says the market is overlooking for all the wrong reasons, in industries as diverse as tires, pharmaceuticals and telecom. This group includes Michelin Tires (the “M”), Netherlands-based international grocery retailer Ahold Delhaize (the “A”), Japanese telecom NTT Docomo (the “N”) and big phama company GlaxoSmithKline (the “G.”)
Bhansali calls up comparisons with baseball’s Billy Beane, whose story, (told in the book and film Moneyball) was that avoiding losers is almost as important as buying winners. “He refused to settle for losing games and losing money. That was the business model for that game before he came along,” she said.
She’s into managing risk as much as picking momentum trades that could fail, she said, since those who lose big can be hardest to recover from when returns are compounded. It’s also her belief, she says that if everyone is saying the same thing, there’s no payoff for having the right answer about an investment. The information is already part of the price.
Bhansali points out that despite the S&P 500’s almost 30% return last year, earnings barely moved up. “And what happened is, the vast majority of that appreciation was because of the P/E multiple expanding as opposed to earnings per share going up. … You just paid up more for the same damn thing. Have you ever heard it being called an investment bargain where you pay more and you get less?” She points out the comparisons to 1999 when growth was in favor and says an inflection point is again at hand to favor value.
So how are FANGs losers? In Bhansali’s mind, people are buying into concepts, not companies and rewarding past success and ignoring fundamental problems (think GE.) At Facebook, she says, the user base is saturated. Everybody who is going to get an account has likely gotten one and the company is being rewarded for future high secular growth (off of having no new users) that it can’t repeat. The growth is instead going to come from CPM (roughly, cost for 1,000 impressions or ad time). “That’s where growth is going to come from, but we don’t know what they charge. We don’t know the ROI of their investments. … We don’t know if consumers will tolerate higher and higher ad loads.”
She also says the company faces unforeseen pressure from regulators for its past problems handling user privacy and she pooh-poohs the company’s crypto currency effort, saying it will reach a dead end with regulators. Furthermore, despite these companies’ reputation for having no physical costs but intellectual capital, she says data centers are in fact physical, expensive and electricity consuming.
“The risks are ahead of you. The returns are behind you. That to me might be a losing investment opportunity.”