The annual reconstitution to the popular Russell 1000 index had some notable changes. One for investors to consider is the increased weight of Meta Platforms (META 2.98%), formerly Facebook, in the Russell 1000 Value index. The social media company is now the fifth-largest weighting in the index.
Here's how the once high-flying growth stock ended up so heavily weighted in the value index, and what it means for investors.
How the Russell 1000 Index works
The Russell 1000 index consists of the 1,000 largest companies by market cap in the United States. The FTSE Russell Group offers several subindexes, including the growth and value indexes for the Russell 1000. A member of the Russell 1000 may appear in either the growth or value index or both based on various characteristics. Importantly, combining the growth and value sub-indexes per their respective weightings reconstitutes the regular Russell 1000 index.
The FTSE Russell Group uses three criteria for determining the weighting in its value subindex: book-to-price, medium-term (two-year) earnings growth forecast, and sales per share historical (five-year) growth. Each company is then ranked based on its valuation. A company with a median valuation will have its weighting in the Russell 1000 Index divided evenly between the growth and value subindexes. Likewise, a company in the 75th percentile will be divided 75/25. At some threshold, a stock is assigned 100% to the value or growth subindexes.
While Meta has strong sales per share growth over the past five years (over 29% per year), its price-to-book ratio has declined below 4, the lowest it's seen since shortly after its IPO. Likewise, the medium-term outlook for its earnings growth is depressed as the company faces several headwinds to its bottom line this year. As a result, the FTSE Russell Group's algorithm put about 80% of Facebook's weighting in the Russell 1000 in the value subindex.
Is Meta a value stock now?
Meta has seen the value of its stock plummet since it reported fourth-quarter earnings at the start of February. The share price has been cut roughly in half, as a result of its first-ever decline in daily active users and the secular bear market.
Shares trade for a trailing price-earnings ratio of less than 13, the lowest in the history of the stock. And while analysts expect profits to fall in 2022 as a result of headwinds from certain privacy changes and the shift to short-form video formats like Reels, the long-term outlook remains strong. On average, analysts expect 2023 earnings per share to grow 18%.
Importantly, ad budgets continue to shift from traditional media like television to digital, which will act as a tailwind to sustain growth for Meta's core business. On top of that, Meta's investing in several areas with great long-term revenue-boosting potential, including artificial intelligence, its business platform, and Reality Labs, which houses its Oculus team.
What makes a company a good value stock is that the setbacks that pushed its valuation so low are expected to be temporary. A stock trading at a low valuation, because it's a dying business in a dying industry, is not a good investment; a stock trading at a low valuation because of a couple of setbacks in its growth could be a huge winner. Meta looks much more like the latter than the former.
After a significant drop in the stock price and a pullback in the overall market, investors may want to consider adding shares of Meta to their portfolio whether they prefer to buy value stocks or growth stocks.
