RGA Investment Advisors – Meta Platforms: Why We Sold Some

Summary:

• We sold down a portion of our stake in one of the world’s largest companies to finance investments in smaller-cap life science firms and an international life science company.
• Meta remains one of our three largest positions, fluctuating based on daily market movements.
• We are not suggesting that META will immediately decline from here, but we want to express that we are increasingly comfortable acting more nimbly with our winners than we have been in the past.

The following segment was excerpted from this fund letter.

Meta Platforms (NASDAQ:META)

If you recall our most recent commentary from Q4 2023, we emphasized our enthusiasm for small caps, life sciences and international equities. Consistent with this theme, we sold down a portion of our stake in one of the world’s largest companies to finance investments in smaller-cap life science firms and an international life science company.

Why We Sold Some META

We believe this section is crucial for highlighting some of the key lessons we have learned since 2022. At the outset, let us clarify that Meta remains one of our three largest positions, fluctuating based on daily market movements. As you read this, it might in fact be our largest holding. In the closing remarks of our Q4 2022 commentary, we noted that we had “made…META substantially larger” during the quarter. Never did we expect the stock to generate such substantial returns in a short period of time. Between Mark Zuckerberg’s “Year of Efficiency,” a recovery in the digital ad market and an improving macro backdrop, META’s key multiples recovered to a comfortable level within their long-term ranges:

Although these multiples are now back to “normal” levels, they are hardly expensive for a company whose top-line growth re-accelerated into the double digits, with operating leverage and despite ongoing heavy investments in the Reality Labs segment. These are the reasons why we continue to hold a large position in META. As for why we did some selling, we want to emphasize a few key points:

1. META had earned its way to a substantially outsized position and we felt it appropriate to pull back the sizing to more appropriate levels.
2. The pendulum between risk and reward swung back in such a way that the skew is no longer as favorable and the opportunity is far more balanced. Capital intensity is rising and growth will likely recede (albeit modestly) over the course of the year as comps get more challenging.
3. Opportunity cost – we are especially excited about certain opportunities and large positions become the most logical place to raise cash in order to reallocate into areas where we feel returns can be significantly better.

In 2020-21, when some positions traded up substantially and became substantial slices of our portfolios, we emphasized the need to patiently cycle out of positions with a focus first and foremost on tax efficiency and secondarily on our desire to hold stocks forever, with a willingness to hold through extended sideways periods. Two realities we learned out of this experience are as follows:

1. If transactions are pushed off for tax efficiency, the market may not cooperate, potentially altering tax considerations in an unfavorable manner.
2. Sideways periods could indicate that the stock may drop by more than half before it potentially recovers. During such a drawdown, conviction will be challenged, and the ability to think strategically about the stock will be compromised. Selling allows one to weather an inevitable downturn and may provide an opportunity to take an offensive approach by repurchasing the stock aggressively later on.

We are not suggesting that META will immediately decline from here, but we want to express that we are increasingly comfortable acting more nimbly with our winners than we have been in the past. Our ideal position is one we can hold forever; however, that is far simpler when a position’s intrinsic value and stock price move within relatively consistent parameters. Intrinsic value and market value will never move exactly in tandem; however, the more consistently the two align, the better a company becomes for “sitting on your hands” and leaving actions aside. When the relationship between the two ends up extremely volatile, it is imperative to act more nimbly.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.