Is It Time To Recruit LinkedIn For A Growth Portfolio?

May.20.14 | About: LinkedIn (LNKD)

Summary

The company has deteriorating financial efficiency ratios.

The stock is in a cohort of momentum stocks which is getting punished.

The stock has an extremely high valuation based on 2015 earnings estimates.

The last time I wrote about LinkedIn Corporation (NYSE:LNKD) I stated, "Due to the bullish technicals, I will be pulling the trigger here just for a trade right now." After the writing the article the stock dropped 15.03% versus the 0.75% gain the S&P 500 (NYSEARCA:SPY) posted. I knew I should have stuck with my gut feeling and not buy the stock because I was only trading based on what I thought to be bullish technicals. LinkedIn is a professional network on the internet with approximately 277 million users in over 200 countries and territories.

On May 1, 2014, the company reported first quarter earnings of $0.38 per share, which beat the consensus analysts' estimates by $0.04. In the past year the stock is down 18.24% and is losing to the S&P 500, which has gained 12.75% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of -1,241, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the one-year forward-looking P/E ratio of 60.36 is currently expensively priced for the future in terms of the right here, right now. The company has great near-term future earnings growth potential with a projected EPS growth rate of 51.88%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 34.02%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

20Apr14

175.42

797.36

69.86

2.51

38

13.28

60.04

20May14

149.78

-1,241

60.36

2.51

38

N/A

51.88

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Financials

On a financial basis, the things I look for in general are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of but is sporting return on assets, equity and investment values of -0.3%, -0.4% and 1%, respectively, which are all garbage values. In this particular instance, I will forgo the dividend aspect of the financials because the stock is in my growth portfolio, and in the growth portfolio a stock does not have to have a dividend. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

20Apr14

0

0

1.1

1.5

1

20May14

0

0

-0.3

-0.4

1

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Technicals

Click to enlarge

Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling in middle-ground territory with a current value of 42.91 with upward trajectory since 28Apr14. I will look at the moving average convergence-divergence (MACD) chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($149.78), I'm looking at $162.24 to act as resistance and $134.49 to act as support for a risk/reward ratio which plays out to be -10.21% to 8.32%.

Recent News

  1. Even in the face of an upgrade, the stock lost 7.5% of its value. The analyst at UBS which upgraded the stock stated that the stock has "one of the best risk/rewards in our coverage universe" as the reason for upgrading it.
  2. The company reported earnings on the first of the month which beat on the top and bottom line. First quarter earnings were at $0.38 on revenue of $473.19 million versus expectations of $0.34 per share and $466.69 million, but the stock was still down on its luck that day.
  3. The problem with the earnings report was that guidance was light. The company guided for revenues between $500 million and $505 million versus expectations of $505.1 million.

Conclusion

This is definitely one of the better internet information provider names out there because it has a network of professional individuals who make money as opposed to individuals who don't - the company just has to find ways to capitalize on it. Fundamentally, this company is expensively valued on next year's earnings estimates and on earnings growth potential while short and long-term earnings growth expectations are excellent. Financially, there isn't a dividend to speak of and the financial efficiency ratios have taken a dive. Technically, the stock looks to have bullish technicals. Due to the deteriorating financial efficiency ratios, momentum stocks are getting hammered, and they have high valuations. I will not be adding a small position right here.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long LNKD, SPY. 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.