“Cancel Culture” is currently topical in politics. The Parler app was shut down (perhaps temporarily) because Apple and its hosting service couldn’t live with Parler’s status as a more conservative alternative to Twitter and/or Facebook. Several Republican senators and representatives are facing massive backlash for elector objections that have been commonplace through our country’s history. Nobody wants to do business in the future with former President Trump. While the political “cancels” get the press, such cancels happen all of the time in the investment world, usually without an announcement by the cancelor as to why they are choosing to cancel a company.
Sell…or Don’t Buy
Cancel culture happens in the investment world when an investor decides to sell or not buy stock in a company based on principle rather than on earnings fundamentals. This happens all of the time. For instance: currently, there is an ongoing drive to force pension funds to divest themselves of stocks of oil and tobacco companies. This drive is based on its advocates’ desire to defund oil as being bad for the environment and tobacco as bad for people’s health. The drive is not based on business fundamentals, though the advocates hope also to drive oil and tobacco companies out of business, thereby making their position both principle-and fundamental-based. Another example: some investors don’t buy Wal-Mart or Amazon stock and some people don’t shop at either retailer because of what they believe these companies have done that has led to the downfall of many small retail businesses. How are these investment decisions part of “Cancel” culture? Because, by selling or not buying their stock, investors are collectively choosing not to allocate capital to these companies, and if companies have a harder time raising capital, it will be harder for them to do business, even if future sales prospects look good. Take this concept to its logical conclusion and these targeted companies could go out of business because they are unable to raise capital. That is the ultimate goal of these divest movements.
Buy This But Not That
Wall Street Cancel Culture works on the flip side, as well, meaning that companies with “woke” business models get bid up by far more than they should based on the fundamentals of their businesses. Tesla is the latest example. Tesla has become a 10-bagger during the past 2-3 years and is now possesses the 6th largest market cap in the country because investors believe that Tesla is saving the planet by producing electric cars. Nothing against Tesla, but there is no way Tesla will be able to produce cars and earn enough money to justify its current $800 billion market cap, and Elon Musk would probably agree. Ford and General Motors have seen this and their renewed efforts toward electric vehicles (Mustang Mach-E for Ford, and electric delivery vans for GM) have caused both of their stocks to run up thus far in 2021, despite that neither company will likely see any positive cash flow for their electric vehicle initiatives for the foreseeable future. Investors are “canceling” the traditional internal combustion engine and are instead allocating capital toward electric alternatives, and it is having an effect on how companies do business. Whether electric vehicles actually succeed in their goal to save the planet remains to be seen.
ESG Investing
ESG stands for environmental, social, and governance, and those who promote or even run funds that invest in companies that promote “woke” ESG policies seek to change the world for the better in their opinion. Such investors are investing based on their beliefs and principles and not necessarily based on making money for their investors, although they hope to do that as well. Like it or not, ESG investing is a form of cancel culture because the way they allocate capital is based on how they believe the world should work and not necessarily on how the world actually does work. ESG investors would just as soon companies that aren’t up to their snuff go away. They are trying to cancel these “bad” companies and industries by not allocating capital in their direction.
IMO
You may not agree with cancel culture in the political realm but if you invest in one company over another for purely principled reasons and not because of business fundamentals, you are engaging in your own version of cancel culture in your own little way. The end result of cancel culture is not good: people and companies that don’t fit with the prevailing conventional wisdom get shut down or otherwise be put out of business. That is really bad for anyone who might have a divergent opinion on anything. My advice: Always look to business fundamentals with respect to investing, and of course stay diversified within your portfolio and with different asset classes. It is dangerous to play the game of the ESG investor at any level because the result is bad if taken to the nth degree.