as part of our
Momentum is a powerful thing. You either have it, or you
This is what drives many of the highflying stocks, momentum. A
clear example of a stock that has gone through a roller coaster is
Facebook Inc. (
When the stock first came out last summer, there was so much
hype that it drove shares massively higher on the first day. Then
the optimism swung to massive pessimism, and the shares essentially
collapsed over the subsequent four months, hitting a low of $17.55
in September 2012.
At that point, all of the fast money was out of the stock,
leaving longer-term investors the opportunity to accumulate shares.
One thing you have to remember when it comes to investing, know who
the shareholders are.
Part of this can be seen through the charts, part of this comes
from due diligence by looking at who the shareholders are. When
volatility picks up, and the speed of the stock (both up and down)
accelerates, this is a sign that short-term traders are active in
the name. Longer-term investors take larger shares of stock, and
can be seen through regulatory filings, such as a schedule 13D
filed with the Securities and Exchange Commission (SEC).
The reason why this is important is to help one determine
whether or not to buy a stock. Valuation is extremely important,
but only if the investors that are interested in the stock also use
this same evaluation method that you do.
For example, if a company is trading at an attractive valuation,
meaning it's a value stock with a very low price-to-book ratio or
free cash flow valuation, that factor will only have a significance
if value investors are also active in the stock. They will also
recognize the attractive valuation and accumulate more shares.
Momentum and growth investors look at other factors.
Is Facebook a value stock? I think you'd be hard pressed to find
any value investors interested in a $100 billion dollar company
trading at a price earnings ratio of over 187 times, a forward
price-earnings ratio of 43 and a price-to-book value of almost 8
However, growth investors would be interested in the name, and
they are the ones driving the momentum. With the stock continuing
to soar on expectations of revenue growth in excess of 50%, the
company's ability to generate ad revenue on mobile devices is the
When it comes to growth stocks, investors want to see a
catalyst. If there is no catalyst, a stock might remain range bound
for a very long period of time. However, when we see a catalyst,
such as Facebook's statement that its revenue generated from mobile
devices is growing extremely quickly, this drives investors into a
frenzy which they want to participate in.
The real question, if you're not a current shareholder, should
you buy this point?
Our analysis leads us to believe that the upside is quite
marginal at this point. The company basically needs to increase
revenue at least 45% year-over-year, a very large amount for a
company of this size, to justify its current valuation. Their
strategy for increasing ad generated revenue remain questionable,
as to how effective they will be over the long term.
Can the stock continuing higher? It could, as momentum is very
difficult to stop. However, we do see limited upside and any hiccup
or problem will lead to a tremendous amount of selling pressure.
There are far too many questions and not enough answers at this
point for us to recommend buying the stock. We would remain neutral
and look for more attractive stocks to buy.
If you would like to know how we would create a trading strategy
using companies like Facebook, then check out our Flagship
Newsletter or the Aggressive Investor Newsletter. If you would like
to know how we would create a trading strategy for ETF's, then
check out the ETF Total Return Newsletter.
Or we can teach you in a one-on-one coaching session on how to
improve your trading and investing skills.
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By Joel Laceda - August 26, 2013