In my new book "Successful Stock Signals for Traders and Portfolio Managers, Integrating Technical Analysis with Fundamentals to Improve Performance," I spend a whole chapter on Facebook (NASDAQ:FB), 24.06. This is a follow-up to find out if Facebook will ever make it, and if so, when. I use both fundamental and technical tools. Two services I use integrate both technical and fundamental factors. StockpickerUSA.com equally weights fundamental, technical and forecast data. ChaikinAnalytics.com has extensive fundamental and technical analysis tools to rate stocks and is very user friendly. Both of these services are designed for the professional, and I have a business relationship with each service. The data I use here can be easily verified by using the free trial offer of both services.
There is no question that Facebook has the potential of making it big in the future. The only real questions are valuation, and the founder, who owns over 500 million shares. There is also no question that the stock is overvalued and there is too much of a supply overhang. These problems were present on the IPO date and are still present. When will these challenges resolve themselves so that price can move up to the IPO price of 38 and breakout into higher ground? Let's look at the current valuation and see what needs to improve for price to move higher. Further let's see where valuation is taking price short term. In other words how much pain is left before Facebook becomes growth at a reasonable price or even an acceptably unreasonable price? What are the valuation factors in our two quant systems that will trigger a buy?
Chaikin Analytics has an overall rating of "bearish" for Facebook, but not the worst rating of "very bearish." Chaikin's overall rating can be accessed free on the mobile phone app and also gives a breakdown of the rating. Financial metrics are very bearish while earnings performance is slightly bullish.
The detailed write up by Chaikin Analytics can only be found on the service paid for by professionals or well-heeled individual investors. It does not like the high price-to-sales ratio and the relatively low cash flow vs. market capitalizaion. It has had relatively high earnings growth in the past, but not lately. As a result, it has a relatively high projected PE ratio to add to the bearish calculation. Overall expert opinions are neutral, but the analysts opinions have improved recently.
Competitors Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO) are in the green and rated "bullish" by Chaikin Analystics. This raises the question why be in FB when you can be in GOOG and YHOO, which are better rated fundamentally? As long as portfolio managers feel that GOOG is a better value than FB, you know where they are going to put their investment dollars. Until that valuation changes, FB will continue to be weak.
Up until a month ago, my other service StockpickerUSA rated FB as a "sell," but now it is rated as a fundamentally poor, overvalued growth stock with a weak "buy" rating that could quickly revert to a sell. It only has a 3 star rating versus 5 star, which is best. In fundamentals, it is 9th decile where 1st decile is the top 10% of the 8,000 stock universe. The forecasted fundamental data is 3rd decile and that positive allows it to squeeze into a 3 star weak buy category. Few investors will bet the house on forecast data. Obviously those that believe the forecasted data are buying FB on the way down as it targets a retest of the bottom. Or will it put a higher low in place, which would be slightly positive technically? Either way, the price is headed down.
GOOG and YHOO are both 4 star buys, with GOOG showing 6th decile and YHOO 4th decile for fundamentals, and thus, much better than FB at 9th decile. There is an enormous discrepancy in forecasted PE vs. growth. Facebook has a very high forecasted PE of 48 compared to a projected growth of 26%. GOOG on the other hand has a much better forecasted PE of only 21 compared to projected growth of 16%. YHOO comes in with a forecasted PE of 20 compared to 12% growth. Return on equity is 28% for YHOO, 16% for GOOG and only 0.6% for FB.
Facebook has to improve its growth in line with its forecasted PE and improve its price to sales ratio. The market will continue to take the price down until these metrics become more reasonable.
The final question about the founder and CEO, and his enormous holdings in FB is a judgment call. Can he lead the company back to its historical growth numbers? If the answer is no, in the judgment of professional portfolio managers, the price will continue to go down for Facebook because portfolio managers determine the price trend in any stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.