Facebook Thursday and Marlboro Friday

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Facebook Thursday and Marlboro Friday

Three thoughts about Facebook/Meta’s dramatic 26 percent drop today:

#1: Scouring our memory for analogous surprising declines in market-leading stocks, we recalled “Marlboro Friday”. Back in 1993, Philip Morris was a premier US large cap growth stock. It had everything investors look for: strong margins, a stable base of repeat customers, and excellent international growth. The problem was that generic brands were cutting into their market share, and on April 2nd, 1993, the company announced a 20 percent price cut to stem those losses.

While this is an obviously imperfect analogy to what happened to FB today (2 very different industries, etc.), we pulled the price chart for MO for 1993 – 1994 to see how it traded after Marlboro Friday:

As annotated in the chart, it was a long path back for Philip Morris’ stock. The initial drop of 23 percent did not create a low. That would only come 17 days later. There was a retest of that low 5 months after that. Finally, it took a full 18 months for MO to get back to where it was the day before its precipitous drop. On the plus side, it did modestly beat the S&P 500 in 1994 – up 3.4 percent on a price basis versus down 2 percent for the S&P excluding dividends.

Takeaway: seeing a stock that yesterday represented 2 percent of the S&P 500 drop by more than 25 percent in a single day is shocking, so it is worthwhile considering every angle for what comes next. We think Philip Morris’ Marlboro Friday is an instructive analogy. On the plus side, the S&P 500 did fine in 1993 (+10 pct) even after MO’s price cut not only took its stock down but also cast a pall over other consumer packaged goods companies. The warning from this example is more about FB in the near term. If it follows the 1993 MO example, the stock may struggle in the near term. That will feed concerns about US Big Tech stocks and drive further market volatility.

#2: US retail investors aggressively bought today’s drop in FB. We monitor Fidelity’s retail platform daily, looking to see what this cohort is buying and selling. On a typical day, there might be 10-20,000 Buy orders for the most heavily-trafficked stocks.

Today saw FB receive 63,513 “Buy” orders on the Fidelity platform and just 15,847 “Sells”. We cannot recall ever seeing that level of Buy interest in a single name, although during the peak of the meme stock craze several names came close. For reference, the next most-traded names today (on a big down day that should have brought out retail stock traders) were Amazon (13k Buys, and good for anyone who bought today), Tencent (12k Buys) and Tesla (10k Buys). None were anywhere close to the interest in buying FB. In fact, the overall buy interest was pretty slow for such a large selloff.

Takeaway: FB just became a (if not “the”) fulcrum stock for US retail investor confidence. We showed you in the prior point that big blowups in widely owned equities don’t always have the easiest time crawling out of the cellar. Perhaps Amazon’s surprisingly strong earnings announcement after the close will put a floor under Big Tech and help FB stabilize. Whether it does or doesn’t, however, keep FB on your screen in the coming weeks.

#3: Whenever there is a steep selloff in a systematically important name, we hear the comment “Markets can’t be efficient if that can happen”. This is a misunderstanding of what “market efficiency” really means. It does not mean that stocks are properly priced every day. It means that there is no systematic way to spot mispricings. There is a huge difference between these two definitions, and only the latter is correct.

Takeaway: today’s closing price for FB is no more “correct” than yesterday’s. All we know for sure is that tomorrow’s will be different and no one can call whether it will be higher or lower with anything approaching statistically valid accuracy.