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This article first appeared in the Telegraph

THE share prices tell a tale of two very different investments. Just since the start of the year, BP’s value has risen by as much as 24% as the energy giant has ridden on the coat tails of soaring energy prices to deliver bumper quarterly results. Facebook owner Meta, on the other hand, has fallen by nearly 35% over the same short period on the back of disappointing earnings and a bigger than expected slowdown in sales growth.

If you had invested £1,000 in BP at its low point in 2020 your investment would be worth around £2,000 today. If you had put the same amount into Facebook at its peak a few months ago, it would be worth £600 now. With their results for the fourth quarter of 2021 separated by just a few days, they have provided a vivid demonstration of the changing fortunes of so-called growth and value investments. Please remember past performance is not a reliable indicator of future returns.

The two companies are on the face of it very different. BP seems to represent an old world whose days are numbered, helping to illustrate why the UK trades at a yawning valuation discount to Wall Street. The owner of soon to be stranded assets, fossil fuels that are doomed to be left unexploited as we move towards the sunlit uplands of a low carbon future. Meta, by contrast, is a self-styled digital pioneer, guiding us towards its vision of a virtual future - the Metaverse. It sits among the handful of technology companies that have fuelled the US stock market’s remarkable ascendancy in recent years.

Different obviously. But there are actually a surprising number of similarities between the two companies. Both are dominant players in sectors that will be around for years to come. They are both household names. Both are questionable investments from an ESG perspective. BP because, as currently constituted, it represents an affront to environmentalists; Facebook for its alleged disregard for privacy and mental health. Both, finally, are busy telling anyone who will listen that they will be completely different companies in a few years’ time.

Which raises an interesting question for investors. After the recent reset, massively costly for those on the wrong side of it, which of the two will be the better investment? There are two considerations here. Their future prospects and the price that we are being asked to pay for a share of those.

A strong case can be made for both companies’ outlooks. BP is, to quote its chief executive, a ‘cash machine’. With the supply/demand balance in the oil market pointing towards $100 a barrel and sustainably high energy prices for the foreseeable future, it will likely stay that way. That creates a strong platform for the company to reshape itself into a dominant player in renewables and the electrified transport of the future. You may not like the way it makes its profits today, but it is those dirty profits that will allow it to create the cleaner ones of the future. At the same time as it is doing that, it will have the firepower to pay its investors a rising dividend stream, to buy in its shares and reduce its debts.

Meta’s future may be even more exciting, although it is probably far less certain to be so than BP’s looks. In the short term, it too is a kind of cash machine. Despite the hand wringing of the past week, it is still expected to deliver double-digit sales growth this year. Like BP it is using its strong cash flows as a springboard to create its future state. The $10bn losses from the Reality Labs arm behind the Metaverse look more than manageable compared with an estimated $130bn in revenues for the company as a whole this year.

But there is one key difference between BP’s future and Facebook’s. The former’s products are essential building blocks of the modern world and the latter’s are not. We have to heat our homes and fuel our cars. We do not really need to do anything that Facebook has to offer. That’s true of its current products and possibly even more true of its future vision. I view Google, and to a lesser extent Apple and Amazon, as essential elements in the infrastructure of modern life. In this regard they are no different than BP or Shell. I don’t see Facebook that way.

So, this is the backdrop to the second key question. How much are we being asked to pay for a share of BP and Meta? Even after the divergence in the two shares’ performance since the start of the year, the answer is that you have to pay twice as much for Meta’s earnings as BP’s, about 16 times as opposed to eight. Now I don’t know whether that’s justified by the outlook or not. The oil price might fall from here. The Metaverse might turn out to be the next big thing. What I do know is that investing in BP looks like a cheap way to invest in a near certainty (and to earn a decent income while you do so) while Meta is a much more expensive way to speculate on what could be an exciting possibility.

Of course, the beauty of being an investor is that this is a choice that you don’t actually have to make. Let’s say you’d invested £1,000 equally across both BP and Facebook, as it was, seven years ago. You’d have £2,000 today. Doubling your money in seven years is the equivalent of a 10% return every year. A respectable reward for which you haven’t had to decide between the old and new economies, growth or value, the US or UK.

I know which of the two investments looks more sensible to me. But I’m realistic enough to accept that, like those who were still backing Meta at the start of the year and shunning BP, I may have got it entirely the wrong way round.

Five year performance

(%) As at 31 Jan

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
BP 10.6 3.8 -12.1 -40.5 40.8
Meta (Facebook) 37.5 -10.7 20.9 27.7 21.3

Past performance is not a reliable indicator of future returns

Source: Investing.com, share price, excluding dividends in local currency as at 31.1.22

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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