Google (GOOG) Stock, Facebook (FB) Stock Get No Love from Big Money

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Big institutional money managers tend to be the conventional sort, though I’m not talking about their blue power suits or country club memberships. I’m talking about their stock holdings. Managers tend to pile into the same set of large, mega-cap stocks because deviating from the crowd comes with major career risk. And institutional investors simply aren’t willing to risk their careers on Facebook (FB) stock or Google (GOOGLGOOG) stock nowadays.

facebook fb stockLet me explain. Running a mutual fund is a fantastic, high-paying job, but it is also a precarious one. The fund’s success — and thus the manager’s paycheck — is directly tied to its assets under management. This creates tremendous pressure to conform to a benchmark, which is often the S&P 500.

A manager’s thinking goes like this: If I bet big and beat the benchmark by going outside the mainstream, my investors are happy…for a day or two. But if I bet big and lose, I might be out of a job.

So, the result is that most managers become closet indexers who overweight a handful of stocks and hope to beat the market by a percent or two. They’re just not overweighting FB or GOOG.

Imagine how surprised I was when I saw the following chart in the Financial Times, which tracks institutional ownership of nine major tech companies. (Google makes the list twice, so it’s ten stocks but just nine companies.)

Percent Over- or Under-Weighted Relative to S&P 500

The large overweightings in Expedia (EXPE) and Trip Advisor (TRIP) aren’t that surprising. EXPE and TRIP account for just 0.059% and 0.054% of the S&P 500, respectively, so even a small amount of institutional buying will put these stocks out of proportion to the rest. And the overweighting of Netflix (NFLX) is also pretty understandable given that it’s the single best-performing stock in the S&P 500 this year. It’s near the tail end of the chart that the numbers get interesting.

Two of the biggest names in tech —  FB and Google — are massively underowned by institutional investors relative to their weightings in the S&P 500. And where it gets even stranger, institutional ownership of the less favorable of Google’s two traded share classes — the non-voting Class C shares (GOOG) — is “where it should be” relative to its weighting in the S&P 500. It’s the A shares (GOOGL), which actually have voting rights, that are underowned.

What’s going on here? Why are big money investors shunning FB stock and Google stock?

Let’s look at Google stock first. There are two issues: The discrepancy between the share classes and the overall underweighting of Google stock by institutional investors. The latter is the easier of the two to explain. Managers don’t care about the lack of voting rights because they know their votes don’t matter. For would be activists or corporate raiders, Google is an unassailable company. Its founders hold non-traded “super voting” class B shares that make any sort of proxy battle a virtual impossibility. GOOG’s consistent discount to GOOGL, which has actually widened recently, really makes no sense in this context, so it’s perfectly logical for an institutional manager to overweight the cheaper GOOG relative to GOOGL.

GOOG_GOOGL

As for the issue of Google stock being underweighted overall… well, it might come back to that point I made about GOOG being unassailable. Google is not known for being particularly friendly to its shareholders (see “Hey Google, Stop Being Such a Baby and Pay a Dividend“). Google is a profitable company that mints money, yet it’s developed a reputation for being the plaything of its founders rather than a profit-maximizing business.

And the same goes for FB. Zuckerberg is a ruthless competitor and one of the few people who seems to know how to actually make money in social media. Yet FB has also burned through shareholder money on expensive acquisitions of dubious economic value (Oculus, Whatsapp, etc.) and expenses grew at twice the rate of revenues last quarter.

Is there a trade here?

Maybe. While I don’t see an immediate catalyst to change big money minds (neither Google nor FB will be paying a dividend anytime soon… sigh…), you could view the underownership as a contrarian value signal.

The safest move, however, might be a pair trade. Short GOOGL and go long GOOG and eke out an arbitrage profit as the discount closes.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he had no positions in any of the companies above. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/google-stock-facebook-stock-getting-no-love-big-money/.

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