Not even the patronage of Donald Trump could spare Twitter’s share price yesterday as the company published its lacklustre quarterly results. Disappointing ad sales, management turnover and sluggish user growth weighed on the performance of the California-based company, with results coming in below consensus Wall Street estimates. The firm’s net loss hit $167m, up from $90.2m.
Having nabbed its spot as the prime social networking battleground during the US presidential election, there were few clues to the man on the street of its less than rosy fundamentals.
While barely a day has gone by without high-profile members of the Twitterati dominating the news agenda, the company has been battling challenges of its own, with Anthony Noto, its chief operating officer warning of a more competitive environment for digital ad spending since mid-January.
As social media continues to transmogrify it’s become clear that becoming a household name isn’t the same thing as turning a profit.
Fund managers often trumpet the merits of investing in what you know - and there is wisdom in that, but only up to a point.
Veteran investor Peter Lynch complained last year of his ideas on this subject being misquoted and misunderstood.
“I’ve never said “If you go to a mall, see a Starbucks and say it’s good coffee, you should go and buy the stock,” he says.
The key attributes to watch out for, he says, are things like high returns on capital, ample reinvestment opportunities and a long runway through either unit growth or price increases.
The common sense approach of buying what looks like a good business - one you walk into or buy from every day - is understandably beguiling, but beating the market just isn’t that easy, and there are no shortcuts to investment success.
People come in all shapes and size, some are fit, and some or not (….not always easy to tell) and companies are similar.
If you access the markets via a passive option that uses market indices where the company stocks in the index are weighted by their market capitalisation, you will always own more of the largest companies (which have done well previously) than the smallest companies (which could do well in the future). In short, passive investing gives you a high exposure to past winners.
Active managers pick the companies they believe are most likely to deliver the best capital growth and dividends rather than simply based on size. By scrutinising the financial statements and crucially meeting senior company management, professional investors can laser through outward appearances and work out what really lies behind a ‘global brand.’
Written by Claire Dwyer, Senior Manager at Fidelity International.