Morning Brief: How Will Investors React to Facebook, Microsoft Results?

February 01, 2018   Stephen Taub

Both companies reported strong quarterly earnings, but saw their stocks drop in after-hours trading on January 31.

Are investors finally starting to sell the hottest, most popular stocks owned by hedge funds?

Facebook and Microsoft each reported strong quarterly revenues and earnings after the market closed on Wednesday, but saw their stocks drop in after-hours trading.

Shares of Facebook, the most popular stock among hedge funds, fell by about 3 percent in after-hours trading even though revenues beat expectations. The social media pioneer reported fourth-quarter earnings of $2.21 per share, versus a consensus forecast of $1.95. Microsoft, the second most widely held stock among hedge funds, also fell in after-hours trading despite reporting earnings and revenues that beat expectations. What’s more, the company’s all-important commercial Cloud revenues grew by 56 percent in the fourth quarter.

How investors react Thursday and afterward is significant because they’re widely held in the hedge fund industry, but also because Facebook is one of the so-called FANG stocks. Some worry that a Facebook sell-off could spill over to the rest of FANG, the group of technology companies that includes Amazon.com, Netflix and Google’s parent Alphabet.

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Starboard Value nominated four individuals to the board of directors of digital printer Monotype Imaging Holdings. In a letter sent to the company, the activist hedge fund said it hopes to continue a constructive dialogue with management and the board of directors regarding ways to unlock value, including changes to the board. The four nominees are Kristen O’Hara, who has served as chief marketing officer, global media for Time Warner; Clifford Press, managing member of Oliver Press Partners, an investment advisory firm; George Riedel, who has served on the board of Xperi Corp. — formerly known as Tessera Holding Corp. — a one-time Starboard activist position; and Edward Terino, who has served as the president of GET Advisory Service, a strategic and financial management consulting firm focused on the technology and maritime industries.

Starboard heads a group that owns 8.2 percent of Monotype’s stock. Starboard holds 6.1 percent of the shares, while BLR Partners owns 2 percent, according to a regulatory filing. Monotype said in a January 31 statement that it has held "extensive discussions" with Starboard since September 2017 to better understand its perspective. "The company’s goal has been to work with Starboard constructively, and we are disappointed that Starboard has chosen to take this path," Monotype said. "Our financial results, which have sequentially improved throughout 2017, demonstrate that our plan has already started to drive improved performance."

Before Starboard filed its initial 13D, Monotype says it approached 28 potentially interested buyers, including 18 strategic buyers and 10 financial buyers, according to the statement. Of those, 10 expressed interest and executed confidentiality agreements with Monotype, and nine of those parties received a management presentation. Management presentations took place between September 2017 and January 2018. "Ultimately, no definitive offers were received," the company said.

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Total assets in the hedge fund industry rose to a record of $3.55 trillion at yearend, according to London-based scorekeeper Preqin. The total is about 11 percent more than the $3.21 trillion HFR recently estimated in its year-end report. Preqin says the average hedge fund posted an 11.41 percent gain last year while net inflows were nearly $50 billion. While investors appear excited that hedge funds posted their best return since 2013, there are some warning signs. For example, the bulk of the inflows went to more defensive strategies, such as commodity trading advisor funds, which experienced inflows of $23 billion. By contrast, equity funds saw outflows of $50 billion.


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