Facebook – Everyone Hates It. Is It Time to Buy?

If Facebook “closes doors” tomorrow, my life won’t change one bit. I have an account there, but for some reason it has never become my social media of choice. Maybe I am missing something. It is hard to be active on more than two social networks and extract value of the process.

It doesn’t matter what I think or feel as an user here. There are hundreds of millions of people that use Facebook religiously. It is their social network and they use it on a daily basis. Facebook is here to stay. It is an amazing company. Making money out of its stock is a whole different topic.

The only positive element that $FB has going for it, is that all investors hate it. In less than a week, it has transformed from a Ferrari into a toxic waste in the minds of so many. This is what happens when expectations are high and they are not met. Nothing ruins the mood more than bad surprises

I am not here to talk about the merrits of Facebook’s business and its enormous potential. Time will tell if they find a way to monetize better their reach. Price action will tell when the market starts to care about it.

A few months ago, I wrote a post, explaining that most IPOs are terrbile investments, but under the right circumstances could be good short-term trading vehicles. I stand behind my words today.

Many IPO stocks outperformed in Q1, but this happened because the market was forgiving and accommodating. It was a bull market and capital was flowing into equities. Besides, the small float also helped a lot. A little demand went a long way and once IPOs were spotted as an outperforming group, momentum carried on and more and more money came and chased after them. So, bull markets and small float – recipe for quick trading earnings. Look what happened to those stocks when the market went into a correction. Most of them gave back all of the profits and then some. You have to understand the nature of the beast you are dealing with and make sure you don’t overstay your welcome.

There is so much potential supply that becomes available during the first year of an IPO that you really need the backwind of a strong market to keep the price going higher.

It is a simple exercise of supply and demand. Most VCs and employees are anxious to sell at even 50 to 60% discount of the IPO price, because that still means a 2 to 10-bager for them if not more. If their company has managed to go public, it is already a success.

Unless it is a bull market and the initial float is small, the majority of IPOs are terrible investments during the first 6 to 9 months of their existence. It is much wiser to wait for a proper base to form and buy on a breakout to new highs than to hurry and buy blindly.

Some people like to point to Google ($GOOG) and Chipotle ($CMG) as two examples of successful IPOs, but it seems they have forgotten why this was the case:

– It was a bull market when they went public;

– they were relatively early in their growth stage;

– they had relatively small float.

My definition of a small float is under 50 million shares. Facebook has 1 billion shares. And besides, the market is not healthy today.

Is Facebook a great investment here?  – I don’t know. When in doubt, I stay out.

 

15 Strong Stocks for the Choppy Summer

Given the negative headlines over the past 24 hours, the  market is surprisingly resilient. The S & P 500 managed to come back from a 1.5% drawback and finish flat. High-beta, momentum names fared even better. We saw several breakouts to new multi-year highs: $EXPE, $TRIP, $SWI, $PETM. Also numerous bounces from rising 20 and 50dmas.

During market corrections, future leaders build bases. This is why it is useful to keep an eye on stocks that are advancing to new highs while the market averages are struggling.  Here is a list of 15 stocks that meet that criteria. 13 of them were featured in the latest  StockTwits 50 list: $SSYS $DDD $EXPE $TRIP $Z $SWI $FIRE $TNGO $EAT $GNC $CERN $EBAY $MNST $WWWW $ALGN

Other than that, I expect another crazy summer. Stocks will be severely impacted by macro-driven headlines – deja vu of 2011. Europe is still a mess. Its politicians are poker players that are challenging each other every day. Who is going to blink first? There is no doubt that the implications for the market’s sentiment will be enormous. The chopfest will reign supreme and we will likely see pockets of substantial strength and weakness, coming one after another and continuing long enough to confuse everyone. Welcome to the new normal.

Note: click on the picture above to see the charts of all 15 stocks.

10 Insights I Learned from Benjamin Graham

Benjamin Graham doesn’t need an introduction. His sober look at the stock market has built an enormous following and for a good reason.

Here are some of his brilliant quotes and my comments on them:

1. “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”   –  It is true that perfumes come and go out of popularity, but no trend lasts forever. There are trends that last 3 months; there are trends that last 3 years.

2. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” – it depends on to what level has the expected growth been already discounted. The truth is that it is really hard to forecast growth in quickly developing businesses. The market always overdiscounts at some point, but in the meantime trend followers could make a killing. You never know how long or how fast a trend could go.

3. The only constants in the markets are change and uncertainty. Not only business environment changes, but also people’s perceptions of stocks change. Look at $GMCR for example. It went from making a new all-time high at $10 back in March 2009 to $115 in September 2011 to $25 today.

Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

4. Different catalysts matter for the different time frames:

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

5. The difference between a trader and investor

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

6. How to think about risk

The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions. The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety.

7. There is nothing guaranteed. The market doesn’t owe you anything. There are no sure things. Equity selection process is important, but risk management discipline should always trump conviction:

Even with a margin [of safety] in the investor’s favor, an individual security may work out badly. For the margin guarantees only that he has a better chance for profit than for loss – not that loss is impossible.

8. “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

9. “Wall Street people learn nothing and forget everything.”

10. “Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble … to give way to hope, fear and greed.”

House of Mirrors

 

There is a saying that the market reflects the price of everything and the value of nothing. Wall Street is such a house of mirrors. There are very few original thinkers. If you have a good track record (read you were right at least once big time) and you sound and act confident, not only no one is going to question you, but also you are likely to have tremendous impact on the market.

Are there way too many “second level” thinkers in this market, who prefer to take the short cuts and let’s say look only at charts and follow established names? Everyone is taking the path of least resistance, not only because it takes less efforts, but because it has worked most of the time. Who is left to do the real homework? I am certainly guilty of charge.

I am sure that even David Einhorn was pleasantly surprised by the reaction his comments caused during Herbal Life’s conference call. Here is what one of the StockTwits’s users rightfully pointed out earlier today:

ronbo811$HLF stock went from $6 in 2009 to $73 and today everyone just realized the comp is a scam after a couple questions at a meeting?…Really?    May. 1 at 11:18 AM

He makes a really good point. Benjamin Graham liked to say that “Price is what you pay. Value is what you get”. The reality is that value is what you think you get. Price is what the market is willing to pay for it. Value could be very subjective, even in the stock market. What is worth zero to you, is worth $1 billion to Facebook, for example.

 
And another comment:
 

KidDynamiteBlog$HLF funny thing is that if I hadn’t come to the conclusion that I was wrong I would have bought even more stock and made a killing!  May. 1 at 1:07 PM

Everything looks so clear and easy in hindsight, but it is never so in real time.

The market has become so short-sighted, impulsive and reflective. Or maybe it has always been like that.

Prices change when expectations change and the latter change under the influence of outside factors. In short-term perspective, price could go anywhere and the major catalyst that impacts expectations is price action itself.

Disclosure: I traded $HLF during the day. I didn’t mention it on my StockTwits stream, because it was a short-term trade that was hard to follow.