Facebook (FB) is down 40% from its high. It’s cheap, right? Time to buy, right? Not so fast. (November 19, 2018)
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I want to look at Facebook ( NASDAQ: FB) today and here’s why: I want to save you from yourself. There are a lot of traders, particularly the newer kind, that would look at this and think that this is Facebook ( NASDAQ: FB), you have got to be able to buy it here. My gosh, just a month ago it was up above 200.00 now it’s down to 130.00, it can’t go down forever. The news is so horrible, isn’t it time to buy? Don’t you want to buy when there is blood in the streets?
I think generally speaking you could say that’s a good idea; I just don’t think it’s a good idea here and this is why: I won’t do any editorializing about the “scumburgs” and all that. I have never been a Facebook ( NASDAQ: FB) guy, anybody who has followed me knows that. I am just kind of surprised, actually, that people caught on because typically they don’t do that, especially with some people like this.
I want to look at the fundamentals and this is my contention; most people think that as a stock falls it gets cheaper, the P/E gets better, it gets cheaper and you’ve got to buy it. If you liked it at 150.00 you got to love it at 130.00. But I want to explain to you that that is actually not the case.
We are going to look at MarketSmith here, this is an IBD product, I really like MarketSmith. The actual platform itself is a little bit slow but I am not going to gripe about it because I have learned to make a lot of money off the data here.
I want to point something out to you, look at these numbers down here. Earnings and Sales, this is the growth of a particular quarter, again, Earnings on top, Sales on the bottom over the same quarter the prior year. In other words, back here the quarter ended, 2017, the 4th quarter. What is the earnings and revenue growth versus the same quarter that ended in 2016?
Then similarly here, the first quarter of 2018 ended March 31. What is that compared to, versus, the same quarter of 2017? So we are looking one year back and these numbers look pretty stellar here. Earnings growth, my gosh, 83 percent versus the same quarter the prior year. And then 63 percent the following quarter versus that same quarter the prior year, that ‘s still pretty good. And then 32 percent, well that is still pretty good too. And 11 percent, you know, still pretty good; 11 percent earnings growth versus September 30, 2017.
Similarly, in Sales. Their revenues, 47 percent, this is 47 percent growth over the same quarter the prior year; 49 percent, well that would be better, wouldn’t it? That’s pretty awesome. And then 42 percent, we’ve got three quarters in a row of sales growth of over 40 percent versus the same quarter the prior year. This is a company that looks really strong. I mean, for crying out loud, who wouldn’t want to be in this company? And then finally, this most recent quarter, the sales or revenues are up 33 percent versus the quarter ended September 30, 2017.
So these are all smokin’ hot numbers until you start looking at the trajectory here. Earnings Growth, 83 percent, 63. 32, 11. What does this look like? It looks like a down trending chart. Similarly, with Revenues. 47, 49, 42, 33, so we’ll go here and then this is looking like this too.
Here’s the point, the market looks forward not behind. All of this stuff, great, yippee ki yay, 83 percent a year ago, wonderful. Not even, what have you done for me lately but what are you going to do next? In order to get that we have to see what has happened before and what the trend is. If you look here under Earnings Per Share estimates, for 2018, 20 percent earnings growth. For 2019, 1 percent earnings growth; 1 percent, imagine that. That is a 95 percent deceleration. P/E, 19, great, it is just a little bit over the average S&P stock. How about this growth rate, 78 percent? Well, that’s 78 percent average over the last 3-5 years, using a mean reversion, the sum of least, blah, blah, blah and all that.
The bottom line is, over the last 3-5 years the growth rate is 78 percent, which is pretty smokin’ hot until you look at this line evidencing earnings and this line evidencing sales and this number and this number. So you can expect, over the next year that this growth rate of 78 percent will start being averaged down. The market looks for stocks of companies with growth rates that are going the other way, that are going up like this, not down.
And so Facebook ( NASDAQ: FB) is one of those stocks that I would say, if you own this stock you either don’t understand how the market works, how investors truly invest, where they look forward, not behind. Or you just have a love for Facebook ( NASDAQ: FB) or maybe a lack of imagination or just not much experience.
But here’s something that I want to tell you, this stock at 131.00 is not cheap. There is nothing that says that this stock can’t ultimately fall to $100.00. It was there just a couple years ago when growth was so awesome but after all the things that have happened I think that there is probably not going to be a huge growth rate going forward. Again, I am not a Facebook ( NASDAQ: FB) guy, everybody knows that. I am just saying there are more and more people like me that don’t like what Mark and Sheryl do. They are kind of voting with their cyber feet and moving elsewhere and you are going to be seeing that in the numbers. I do not believe that it is too late to sell Facebook ( NASDAQ: FB).
At some point the stock is going to rally just because it is so oversold. And then you are going to say, “Well see Dan you are an idiot, you told me to sell at the bottom.” That is not what I am doing. This stock just like any of the other stocks can be zigzagging upward on an oversold bounce. I am just talking about the fundamentals of the company, which are deteriorating. The stock, which looks about as ugly as a stock can look while still having more room for the downside, so just don’t go there. If you are looking for oversold bounces definitely keep this on your screen as a candidate. But if you are looking for someplace to park your money to ride through this, this isn’t it, I’m just telling you.
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