A year ago I suggested that you should short social media “microblogging” site Twitter. I made the call based on its valuation, especially when set against its mediocre long-term prospects, and the growing backlash against the industry in general. In the event, the trade didn’t do much, and I eventually suggested that you close your position at a small profit. Fast forward to today, and in the past week, the company’s shares have plunged by around 20% – from just under $40 to barely more than $30, after its latest earnings and revenue figures came in far below expectations. However, I think the share price could fall still further.
The reason for Twitter’s big earnings and revenues disappointment is that the social network is finding it harder to strike a balance between its users’ desire for privacy and its advertisers’ need to ensure that their ads reach the intended audience. This has been made worse by the fact that a few months ago Twitter was forced to admit that it had been ignoring the explicit wishes of those users who didn’t want to share particular information, and had shared it anyway. Thanks to the fallout from this scandal, and greater regulatory pressure, it has decided to restrict the amount of data shared, which has made it far less attractive to advertisers, hitting revenue.
Privacy isn’t the only area where Twitter is falling foul of public opinion and politicians. Over the past year there has been increased concerns that social networks in general have been used to spread misinformation, propaganda and hate speech. Whether justified or not, the campaign to regulate Twitter, and others in the sector, seems to be gaining momentum around the world. This is shown by the tone of the recent grilling that Facebook founder Mark Zuckerberg received from the US Congress, as well as the content of the UK government’s Online Harms white paper and the various regulatory noises coming out of Brussels. While a less lively and controversial Twitter may or may not be a good thing for society, it would definitely make it less attractive to users – and thus to advertisers.
Thanks to these factors, along with greater competition from other social media platforms, it looks like Twitter’s best days may be behind it. Indeed, experts now think it will struggle to maintain double-digit revenue growth, let alone the 30% annual growth it previously enjoyed. Viewed in this context, it’s hard to justify the fact that Twitter shares are trading at seven times current revenue, and more than 30 times next year’s earnings, especially at a time when investors have become more sceptical of the technology sector as a whole.
Overall, I suggest that you short Twitter shares at their current level of $30.30 at £150 per $1. I’d suggest that you cover your position if the share price goes back above $37. This would give you a total downside of £1,006.
Trading techniques… consumer surveys
Traders often pay close attention to economic data based on the theory that a strong economy boosts profits and thus the stockmarket, while a weakening economy will hit share prices. This makes sense. Virtually every US recession since 1871 saw the market fall, and in 20 out of 29 cases the S&P 500 had failed to recover its lost ground even by the time the recession had finished.
Trouble is, most economic data is backward looking (and also frequently revised). What traders really want is an indicator that can reveal not simply where the economy has just been, but where it’s likely to go in the future.
Consumer sentiment surveys are an attempt at one such indicator. One of the best known is the monthly series from the University of Michigan. A representative sample of around 500 people answer questions about their views on the economy and their own finances. Their answers are combined to create an index where a higher figure indicates greater optimism.
Unfortunately, the evidence suggests that these surveys are poor predictors of future returns – they may even serve as contrarian indicators. A 2002 paper by Meir Statman of
Santa Clara University and Kenneth L. Fisher of Fisher Investments found that “low consumer confidence is followed by high stock returns more often than it is followed by low stock returns”.
Meanwhile, a later study by Malcolm P. Baker of Harvard Business School and Jeffrey Wurgler of NYU Stern also found that shares – particularly small-cap and growth stocks – performed much better than usual after periods of low confidence.
How my tips have fared
As you’d expect, given the strong performance of the stockmarket on both sides of the Atlantic, over the last fortnight my long tips have done well – five of the six have made gains. JD Sports has risen from 769p to 772p, Safestore is up from 692p to 698p, and Bausch Health Companies has gone up from $20.91 to $23.75. Volkswagen has also risen from €163 to €176 while British Airways owner, International Consolidated Airlines Group, has risen from 502p to 520p. The only share that went down was Bellway, which fell from 3,291p to 3,236p.
Sadly, the rising tide that lifted my long tips has also lifted my short tips, with only one out of the six declining in the last fortnight. Weis Markets went up from $36.01 to $37.13, Uber also rose from $31.12 to $33 and Wayfair went up from $105 to $113.
However, the most dramatic increases were seen in Tesla, which advanced from $257 to $333 on the back of surprisingly good earnings figures, and bitcoin, which leaped from $8,321 to $9,400, thanks to signs that China might be about to adopt a more sympathetic stance on cryptocurrencies. The only stock that bucked the trend was Netflix, which edged lower from $286 to $284.
Overall, my longs are making a total profit of £4,436, while the profit on my short tips has shrunk to £708. As a result, the 12 tips that I had open going into this week are now making a combined profit of £5,142 – down from the combined profit of £5,511 two weeks ago (losses on closed tips are £6,356). Because the Tesla position is in the red and is now older than my ideal six-month holding period, I’m going to recommend you take your loss of £480 and move on – it seems that Elon Musk’s company has surpassed expectations yet again.