Barclays’ Accelerated Return Notes on basket of tech stocks to fit mildly bullish profile

By Emma Trincal

New York, Dec. 10 – Barclays Bank plc’s 0% Accelerated Return Notes due February 2022 linked to an equally weighted basket of technology sector stocks offer an attractive leverage multiple, but the volatility of the underlying stocks may disappoint both bulls and conservative investors.

The basket consists of the common stocks of Facebook, Inc., Amazon.com, Inc., Apple Inc., Netflix, Inc. and Alphabet Inc., according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus 300% of any basket gain, subject to a maximum return of 19.2% to 23.2%. The exact cap will be set at pricing.

Investors will be exposed to any basket decline.

Full downside risk

“If you’re short-term bullish, getting that 16%-19% annual return is reasonable,” said Steve Doucette, financial adviser at Proctor Financial.

“If you’re only mildly bullish, you get that double-digit return pretty easily with the 3x leverage.

“But you don’t have any downside protection, and that’s the problem. You may be upbeat about tech stocks. But you should be able to outperform on both sides because you could be wrong.”

The so-called “FAANG” stocks (Facebook, Amazon.com, Apple, Netflix and Alphabet) have strongly outperformed the market this year.

“Those big-tech stocks aren’t cheap. These are the five stocks that have been driving the bull run, and they could turn the other way, especially with the regulatory pressure. Just look at Facebook,” he said.

Regulatory scrutiny

On Wednesday, the Federal Trade Commission and 46 states filed antitrust lawsuits against Facebook alleging that the company is “illegally maintaining its personal social networking monopoly through a years-long course of anticompetitive conduct,” according to an FTC news release.

To stop Facebook’s alleged anticompetitive practices, the commission may require Facebook to seek approval for future mergers and acquisitions and even force it to spin off Instagram and WhatsApp.

The stock dropped 2% on the day of the announcement, but analysts are not overly concerned.

“We expect the courts to side with the FTC regarding limitations on future acquisitions, but we think the likelihood of a forced breakup is low,” wrote Ali Mogharabi, senior equity analyst at Morningstar, in a research note on Thursday.

Regulatory headwinds are a wildcard, Doucette said.

“We don’t know what kinds of fines or lawsuits could hit big tech, now or in the future and not just here but also in Europe,” he said.

“If they ever broke up Facebook, it would affect the value of your underlying.

“Let’s say Facebook drops 30% and the other four are up 5%: you still end up with a loss.”

Big tech momentum

Facebook rose 35% this year while Amazon and Apple returned 68%. Netflix is up 55% and Alphabet has seen its price rise by a third.

“I think you could miss a lot of the bull momentum with 16%. If you buy the note, you’re obviously not a bull but you’re also not concerned about the downside,” he said.

Having a view over a 14-month timeframe made an investment in the note even more challenging.

“As we see the valuations of these things stretch to the extreme, you could expect a reversal. In that case you have no protection on the downside.

“On the other hand, with the vaccines moving forward, more consumer optimism, those tech stocks could continue to run. Here you get capped out if they’re up 6% or 7% a year. If you buy the stocks outright you can do much better than that.

“It’s a tough call,” he said.

With so much uncertainty, Doucette said he would probably consider a similar note with less leverage and some amount of downside protection.

“Ideally you would want at least a 10% buffer. If you can’t get this on a 14-month, why not extending the term?

“Doing it on a two- or three-year timeframe would give uncertainty more time to play itself out.”

Upside capped

Matt Medeiros, president and chief executive of the Institute for Wealth Management, did not find the structure attractive.

“I’m not sure it adds much,” he said.

“The FAANG stocks are overvalued, and we’re seeing a shift from growth to value. But they’re still the leaders in their space.

“This note has leverage, but it also caps your upside. I would be more inclined to buy an ETF to reflect these holdings.”

Not for bulls

Medeiros saw shortcomings on both sides of the payout.

“When I buy these FAANGs, I don’t want a cap. I think there is definitely some risk of significantly limiting your upside. Those stocks have skyrocketed this year. I can easily see another 30% increase,” he said.

“By the same token, they’re highly valued and highly volatile. I don’t see the point of having so much leverage with that type of stock.”

A significant amount of upside leverage would make more sense for an asset displaying a less aggressive return profile, he noted.

“If I had to use 3x leverage, I would prefer to do it with something less volatile, something much more predictable,” he said.

“Getting triple the return of the MSCI EAFE index makes a lot more sense, for instance.”

BofA Securities, Inc. is the underwriter.

The notes will price in December.

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