Dance To The Market Music: 1 Short, 1 Long

| About: Facebook (FB)

In many ways, stock investing is like a musical. Stories are told, and you have to "dance to the music". You have to look at the prevailing ideas in the marketplace, and how they will play out in the weeks ahead.

You can do all the homework in fundamental valuation, but there is no guarantee the market will ever agree with you. Often the best approach is just to step in and step out to the rhythm of market moods.

Sell Buffalo Wild (NASDAQ:BWLD) To The Music Of Einhorn

If you search "Einhorn" on ZeroHedge the result will sarcastically ask

Did you mean Einstein?

That's because David Einhorn is a genius of short-selling. He is like a meteorologist in forecasting perfect-storm stock selloffs. Einhorn recently forecasted the selloff of Chipotle (NYSE:CMG) based on unsustainable growth expectations, and emulation by competitor Taco Bell (NYSE:YUM). But it's probably too late to safely get in on the CMG selloff.

Akram's Razor, who has blessed Seeking Alpha readers with countless successful short ideas (most recently a perfect short of Mellanox (NASDAQ:MLNX)), suggests that there are comparable Chipotle shorts waiting to be exploited. On a valuation basis, Buffalo Wild Wings appears to be the most exploitable.

BWLD PEG Ratio Chart

BWLD PEG Ratio data by YCharts

Buffalo Wild Wings is cheaper than Chipotle in terms of cash-adjusted P/E, and Buffalo Wild Wings is 9x smaller so it has more room for growth. However, Einhorn's short was based on a reversal of momentum, and thus PEG is the most appropriate metric for establishing a comparison. As you can see in the chart above, BWLD could lose 1/3 of its value when PEG corrects in the direction of Chipotle.

Below is the volatility implied by options pricing (dark blue) relative to the volatility implied by historical sample (light blue). Look at the upswing as of 9/9/12. This means options traders are expecting a bigger move than price history would suggest.

Buy Facebook (NASDAQ:FB) To The Music Of Google (NASDAQ:GOOG)

I called "GOOG top" on October 5. My primary reasoning was: in risk-off, the market wasn't going to hold tech, and competition from Facebook was going to find its way into Google's valuation.

So far the explanation of Google's lowered Pay-Per-Click earnings report has focused on pricing dilution from mobile. This is not a surprise, because "mobile" is the popular cliche in 2012 tech investment media. Plus, it's not like Larry Page is going to come out and say "Facebook is making us lower our prices".

I believe that Facebook's forward-looking claim of posing legitimate competition to Google is bolstered by the Q3-reported dilution of Google's PPC pricing. But it remains to be seen if Google PPC dilution and Facebook competition will merge into a singular narrative lending credibility to one another. It depends on who Henry Blodget happens to read on any given day.

In early September I noted increasingly loud and redundant criticism of Facebook in investment media and emailed friends to say it felt like a bottom. This was at the $18 level which will now be retested in risk-off. I believe the bottom will pass the test in days ahead, and that this will soon enough shoot shares up into the low twenties.

I have not written a bullish article about Facebook until now because I felt it was a crowded trade. I did not turn bullish on Facebook until early September, because I thought it was a crowded trade.

If Facebook coherently presents itself as a Google competitor, it could go to $30 on pure hype. In the long-term, Facebook is much more than hype. There is only one Facebook, and only one Mark Zuckerberg; the opportunity to own them at a feasible bottom does not come around often. Why not dance to the music?

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.