Why stock investors should keep an eye on social media

Anthony Fensom agrees that buying superior businesses based on long-term fundamentals is the most effective way to generate wealth in the share market. But he does see merit in keeping an eye on social media.
By Morningstar |  03-02-17 | 
 
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U.S. President Donald Trump's love for Twitter has had investors scrambling to keep up, with automakers, defence, and pharmaceuticals companies among those to suffer the share price impact.

But social media also has its benefits, particularly for smaller listed companies, according to recent Australian research. Morningstar's head of equities research, Peter Warnes, has warned of a "higher-risk world" in 2017, with "risk-on" investments performing strongly since Trump's election victory.

Yet the billionaire businessman-turned-politician's penchant for tweeting his daily thoughts already has market watchers on edge.

According to The Los Angeles Times, sophisticated traders with automated programmes are using computer algorithms to capture Trump's tweets and trade on the results.

In one example, a Trump tweet caused Toyota's U.S.-traded shares to drop by nearly 1%, losing $2 billion, after he expressed his displeasure that the Japanese automaker planned to build Corolla cars for US sale at a new plant in Mexico.

The tweet: Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.

In another case, shares in U.S. aircraft manufacturer Boeing dived by $2 before market opening after Trump commented on high costs.

The tweet: Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!

However, shares have moved upwards on Trump's tweets too, including Japanese telecommunications firm Softbank, which gained 5.5% on Trump's praise of its reported plan to invest $50 billion in the U.S.

The tweet: Masa (Softbank) of Japan has agreed to invest $50 billion in the U.S. towards businesses and 50,000 new jobs. 

Investors seeking to trade on these tweets could use one of the smartphone apps already developed to monitor Trump's tweets. However, swift action could be vital, since most of the stocks affected quickly recovered their losses.

"If you decide to make a strategy on [Trump's] tweets, you better make it a buy strategy--because [Trump's criticism] clearly hasn't had any lasting effect," CNBC markets analyst Jim Cramer said.

Trump is not the first public figure to move markets, however. U.S. biotech stocks dived in September 2015 after then U.S. presidential candidate Hilary Clinton tweeted about her plans to take on "price gouging" in the specialty drug market.

The tweet: Price gouging like this in the specialty drug market is outrageous. Tomorrow I'll lay out a plan to take it on. -H

Past tweets by billionaire U.S. investor Carl Icahn and Tesla Motors chief executive Elon Musk have also hit share prices in the stocks they mentioned.

Carl Icahn's multi-billion dollar tweet boosts Apple stock

Elon Musk's $670 million tweet

Bernie Sander's tweet caused a drug company's stock to fall

Trump's tweet about Lockheed-Martin causes share price to fall

While Trump's tweets have hit the headlines, a recent Australian study has pointed to the broader significance of social media for stock investors.

According to Victoria University's Dr Maria Prokofieva, ASX-listed companies that tweet corporate news can affect their share prices, even if their social media posts contain no new information beyond that already available via the stock exchange.

Based on a study of 3,516 corporate announcements made by companies over the period from 2008 to 2013 via the ASX, Dr Prokofieva found that information provided via social media can "unintentionally influence" investor decisions.

"While a common belief is that prices in the market reflect all available information, the reality is far from this. Individual investors are limited in time and resources and are unable to track all securities and release of all new information," she told ABC News.

"So, companies that put extra effort to reach their investors are rewarded; they are able to grab the investors' attention and lead them closer to the decision to invest."

She said the benefit was greatest for smaller companies that have less analyst and media coverage, but which could use platforms such as Twitter to reach investors.

A 2013 report by BRR Media found that 78%of ASX 200 companies were using at least one social media channel. LinkedIn was their favourite platform, used by 58%, followed by Twitter at 47%.

However, social media has also been used against ASX companies. Market rumours spread over social media against then listed retailer David Jones and miner Whitehaven Coal caused a significant hit to their stock prices.

Significantly, U.S. research has shown that online search activity can predict price movements in stock markets, and even in the residential property market. The greater the search intensity, the greater the price effect, according to Costas Milas, a finance professor at the University of Liverpool.

Morningstar's philosophy of buying shares in superior businesses based on their long-term fundamentals and allowing them to compound over time is considered the most effective way to generate wealth in the stock market. But it might also pay also to keep an eye on those companies, corporate and political leaders that are most active on social media, since the rest of the market will be too.

Anthony Fensom wrote this post for Morningstar Australia where it initially appeared. 

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