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A Complete Benjamin Graham Analysis For Facebook

GrahamValue profile picture

Benjamin Graham was an economist and professional investor who taught Warren Buffett, Irving Kahn, Walter J. Schloss and other famous investors at Columbia Business School.

Buffett, who credits Graham with grounding him with a sound intellectual investment framework, describes Graham as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons after him. In the preface to Graham's book The Intelligent Investor, Buffett calls it "by far the best book about investing ever written."

Graham recommended three different grades of stocks for investment, with specific calculations for identifying them. Today, we will do a complete Graham analysis on Facebook (FB) and see what grade and price Graham would have recommended for it.

1. A Defensive Analysis:

The first grade of stocks recommended by Graham are called Defensive stocks. The criteria that Graham specified for identifying Defensive stocks are as follows:

Summarized from CHAPTER 14 of The Intelligent Investor - Stock Selection for the Defensive Investor:

1. Not less than $100 million of annual sales.

[Note: This works out to $500 million today based on the difference in CPI/Inflation from 1973]

2-A. Current assets should be at least twice current liabilities.

2-B. Long-term debt should not exceed the net current assets.

3. Some earnings for the common stock in each of the past ten years.

4. Uninterrupted [dividend] payments for at least the past 20 years.

5. A minimum increase of at least one-third in per-share earnings in the past ten years.

6. Current price should not be more than 15 times average earnings.

7. Current price should not be more than 1-1⁄2 times the book value.

As a rule of thumb we suggest that the product of

This article was written by

GrahamValue profile picture
Value Investing Software True To Benjamin Graham. Apply the complete Stock Selection Framework for Intelligent Investors — that Warren Buffett recommends — optionally adjusting for Interest Rates and Inflation. Free! SerenityStocks is now GrahamValue.com #intelligentinvestor #warrenbuffett #valueinvesting Recommended Articles: 1. How To Build A Complete Benjamin Graham Portfolio (2012)  2. Using The Graham Number Correctly (2012)  3. Understanding The Benjamin Graham Formula Correctly (2015)

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Comments (57)

Oh gimmee a break , jeepers ... up 30% in 10 days not a squeeze. You don't have to be short the stock to be "squeezed" into chasing it higher. Mutual Fund with Nasdaq100 as its benchmark ... No holding in FB .... starts underperforming benchmark as has no exposure to this $60b monster ... realises could be start of move to $50 ... starts chasing , needs a couple of million shares just to be neutrally weighted in the stock , but as stock runs higher needs 2.1m shares ... effectively short delta in a rising market .... NASTY !!!
How's all those short positions going guys ... shares up almost 1/4 since the lockup expired and the shares were "CERTAIN!!" to fall. Oh if only trading was that easy. Remember the market will try and make you look the MOST foolish it possibly can ... FB in the last 7 days is a classic case in point ... $30 early next year and still SQUUUEEEZZZIIINNNGGGG .... OUCH !!
six-oh profile picture
The funny thing is, you're right about one thing... the stock price is up. You're wrong about everything else. You still don't know what a squeeze is.
johnjakubowski profile picture
well, my take on the gain was market maker politics.
they ( probably MStanly- their underwriter ) convinced either institutions or premium individuals to absorb every sell that came onto the market - theres no other explanation.
On one of the worst days of the month for the market, FB pops 12% - really ? And its still going up. They 'played' the biggest 'lockup expiration' in their history by nailing the price. I still can't explain the rise.
The other side would be that people were so eager to buy up almost a billion shares of an unproven, highly branded company in a very shaky economy. I don't buy it.
I also don't the 'crowd theory' thing - the premise being if there is so much pressure on one side, it reacts the opposite.
I think this was a scam, just like the IPO - now we've been screwed twice by backdoor 'free market' politics.
Whehter it was institutional or venture cap, I don't see them holding this - their job was done, they've circumvented an intersection of events to stablilize the stock and now the drones will follow instead of panic.
Lesson learned. You can screw everyone in your IPO, making billions, fake your earnings and then backdoor all your shorts by convincing your underwriters to absorb your float. I guess one could argue that this is capitalism at its worst.
Free Market my ass.
GrahamValue profile picture
Thank you for your comment, johnjakubowski.
Very informative again! In fact, this discussion has had any unusually large amount of information contributed by the readers.

Marketing and manipulation have been part and parcel of stock markets since their inception (4 centuries ago by the Dutch, incidentally). That's why it becomes all the more important to have a sound objective quantitative framework for making investment decisions that is independent of the market's mood swings.

In Buffett's own words:

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. [The Intelligent Investor] precisely and clearly prescribes the proper framework.... ...Follow Graham and you will profit from [stock-market] folly rather than participate in it."
gwynfryn profile picture
Ah yes, the much vaunted "tulip market" that kicked off Big Capitalism, and its ability to "create wealth" for "everyone"!

'S funny how nobody recalls that it was also the first bubble, and that its aftermath left millions destitute?

You can't eat tulips!
clegg profile picture
15 Nov. 2012
I want to see a number showing deviance of the S&P500 from Graham's number. THAT is a truer indication of inherent valuation.
GrahamValue profile picture
Can you elaborate, clegg?
If you mean a truer indication of the inherent valuation "of the general market", you would be quite correct.

The Graham Number for the S&P 500 works out to $544.94 as against its current value of 1,353.33.
The data and sources used are listed below:

This is the expected result since Graham's calculations were designed for finding opportunities better than the general market.
GrahamValue profile picture
Hello clegg,

There is now a new table giving a comparison of the Facebook and S&P500 ratios. You can see it in the "Conclusion" section, just before the end of the article.

This should give a better idea of how Facebook compares against the general market.

Whatever it was , those silly people that thought going short was a licence to print money and the easiest trade out there on a day when the Dow collapsed almost 200 points FB was up 12% !!! They got right royally ......

You have to laugh !! ( I took some serious profits today ... now flat )
As I predicted ..... SQUEEEEEEEEZZEEE!!!!

It was far too obvious to short FB prior to lockup expiry, what's known as a "crowded trade"

U were warned!!
six-oh profile picture
It's not a squeeze dude. It's because there were deep-pocketed funds, and i-banks, defending the stock. Watch the price fade in the next several trading sessions.
johnjakubowski profile picture
I've never touched an IPO in my life and FB is a perfect example as to why.
Oh, and just to put the icing on it, they do also just do stupid things


The NYT also just reported the sell-off has begun after hours.
GrahamValue profile picture
Thank you, johnjakubowski.

Presumably, we'll know more tomorrow.
gwynfryn profile picture
Same from me, that was enlightening.
GrahamValue profile picture

There is now a new table giving a comparison of the Facebook and S&P500 ratios. You can see it in the "Conclusion" section, just before the end of the article.

This should give a better idea of how Facebook compares against the general market.

johnjakubowski profile picture
Serenity - you are basically correct, Graham would never try to predict future pricings, just establish value within the classes he set up.
Using non-emotional value he would put FB at $3.53
I still think that since FB is trading at 30X earnings ( whatever way you cut the mobile issue ) and there are 778MM shares hitting the market tomorrow ( one of three bog lockup expires ) If you can - I would get out.
If you own FB in an exercise and still believe in the company I would still get out, wait for everything to come to pass ( post March ) and then buy back in.
FB is in a world of hurt, but no one that holds stock is going to tell you that.
GrahamValue profile picture
Absolutely johnjakubowski!

IPOs are extremely complex situations. Graham has a very good write up about them in general and it's worth reading.

In short, his recommendation is to be unusually wary of them.

One - because IPOs have more salesmanship behind them, thus requiring more resistance and caution from investors.
Two - because most IPOs are sold under market conditions favorable to the seller, and thus less favorable for the buyer.
gwynfryn profile picture
OK, a great article, and I may buy the book, but, like Indy, and without such complex measures, nor experience of note, it's always been clear to me that this stock is way overpriced, and have so stated, often! The problem is that there are an awful lot of people out there who have a wholly irrational love affair with FB, and continue to dream of it going to 50 or even 200$ over the next two years! If they don't get it now, why should the expiry change anything?

The current price is, more than anything, an act of faith; we've already seen resistance whenever it approaches 19$, and I have no way of knowing if enough people want to buy in at that price to absorb the "tsunami". This question will decide the future; it seems to me it'll either drop to that level, and then fluctuate around 19$ for quite a while, or else it'll plummet, so any strategy needs to take account of both possibilities. If the trading account I've applied for gets activated in time (which now looks unlikely) I'd limit my puts to 19$ and above, and plan on getting calls later, if it does happen to head for the floor, but maybe you guys can think of better way of improving your chances, whatever the outcome?

I hope I get a chance to have a flutter, as there are rewards aplenty to be made here, but no way am I going to bet big on this dog!
GrahamValue profile picture
Thank you, gwynfryn!

Do note that Graham never tried to predict a stock's future price. As far as Graham is concerned, Facebook may remain at current or even higher levels for years.

Graham's calculations simply recommend the prices at which stocks should be bought to avoid losses and consistently making profits.
gwynfryn profile picture
Yes, I got that! Even so, making a stock a "buy", does rather include the notion that the price will go up, at least (or there'll be plenty of dividend)?
GrahamValue profile picture
You said it perfectly, gwynfryn!

Graham's reasoning was that if a company was better than the stock price indicated, the price would always rise.
The problem is you never know when exactly that will happen. Hence the preference for long bets.
Serenity, great article. I did check your page but I did not info on AEG and AYR. Any comments om them that you could kindly give?
GrahamValue profile picture
Thank you, gbalderas!

The links for AYR and AEG are given below:

Note that these are automated, unverified results.
Both stocks don't seem to meet any of Graham's criteria but any Graham prices that could be calculated are displayed.
We shall see ....
GrahamValue profile picture

If you were replying to rephinbar's comment to you, you will need to click on "reply" below that comment before posting.
mgpagan profile picture
The blunt question is. If you had been given FB stock at or pre IPO and had seen it drop from $38 to the present $20 would you sell tomorrow when the opportunity presents itself to get out with a decent profit? Especially when you see the COO selling large tranches of stock. There can only be one answer...
GrahamValue profile picture
Can you elaborate, mgpagan?
gwynfryn profile picture
It's a question of personality, isn't it? Me, I'd sell, and lose no sleep over the value "lost" (which I'd think of as value "that I never had") but most people take a more erm, "romantic" view to such virtual losses.

The sensible thing would be to cash in and trade elsewhere, at least until FB prices are more rational, but then, if most people where being sensible here, this stock would have tanked ages ago...
GrahamValue profile picture
Hello gwynfryn,

A new table has been added that gives a comparison of the Facebook and S&P500 ratios. You can see it in the "Conclusion" section, just before the end of the article.

This should give a better idea of how Facebook compares against the general market.

rephinbar profile picture
Yes, indeed - great perspective on FB using some very grounded methodology. Good job, Serenity!
GrahamValue profile picture
Thank you, rephinbar!

Serenity's free stock screeners apply the same methodology to each one of the 4000 companies listed on NYSE and NASDAQ.
I found that to be a very interesting article, bravo!
GrahamValue profile picture
Thank you, tjmxxx!
The lock-up is hardly new news ... FB earnings report was SPECTACULAR a few weeks ago! and the shares shot up to almost $24 ... 25% in one day !! They seem to be on the way to nirvana/the holy grail in social media ... which is to monetize mobile. Even with the lock-up , and everyone knows its coming , this would have to be one the the most dangerous shorts in the market. What happens if the lock-up doesn't produce a fresh wave of selling and the shorts start getting panicky ... then Fridays option expiry ( where is the biggest open interest , might pay to check that out !! ) ... SQUEEEEZE .... $22, $23, $24 would only take it back to where it was a few weeks ago.

Disc: Long FB , short Nov$21/$24 Strangle and short Dec $22/$25 strangle. Loved todays price action too.
I really would not call those results spectacular. Also known news is that for this quarter even though revenue was higher, they are still loosing money and they will continue to do so with the RSUs. Another issue to consider is that those results on mobile only cover 3 months, so that's hardly an indication on where the company is heading.

I agree with you that shorting is a speculative move, but I would add as well that going long at these price levels is guessing as well. I bought december puts (certainly not what Graham advises and speculating) and we will see what happens. Greetings and good luck.
six-oh profile picture
FB... a squeeze? Are you serious? How in god's name could there be a squeeze with billions of shares, and lock-ups expiring??? A squeeze can only happen if the shorts can't find shares to buy to cover their positions. The market will be awash in hundreds of millions of unlocked shares. Perhaps you should learn a little bit about how a short squeeze develops...
TangoOscar profile picture
Its not about it being news, its about what is going to happen and it being unavoidable. Facebook stock is going to go lower and will most likely hit new 52 week lows very, very soon. Unless some institutions decide to senselessly buy hundreds of millions of shares and absorb the float come Wednesday and next month and again in May of 2013, this stock is headed for the crapper.

It is trading at around 30 times next year's projected earnings. Apple & Google trade around 12 times earnings. Does some crappy Myspace ripoff stock that is talking about monetizing mobile really justify it trading that high? Additionally its share float is about to be so massive its unreal!

Lets talk about the tax bill that Facebook is facing due to vested sales of it's Restricted Stock Units, which vest approximately 6 months after its IPO. There goes another 2.5 - 4 Billion dollars, or more, straight down the crapper.

And Facebook can't do anything about any of this. If they try and do a secondary to raise cash the stock will head down to Zynga levels. They are in a really, really ugly situation right now and didn't count on the stock losing 50% of its share value in a few months. I don't see any possible way this ends well unless some of these institutions, that already took horrible losses, decide to cough up Billions of dollars to absorb these shares.
johnjakubowski profile picture
anyone have any rationale for the FB spike today - 2 days before billions of shares hit the market ?
If smart money is straight shorting they would have to technically 'borrow the shares' from a brokerage ( Perhaps that would account for the 5% ) ??
TangoOscar profile picture
It looks like it went up on some huge volume spikes, indicating large buyers. Regular investors cannot afford to spend 70 Million here, 45 Million there, buying a stock. My theory is someone is attempting to sucker in buyers before it gets slammed later this week and they attempt to drive the price down harder by getting more people to panic sell.

Another possibility that is far more likely is one of the many firms with price targets of 30 dollars a share that are underwater is trying to get people to hop in and prop the price up. Margin Stanley or somebody else with a huge financial interest most likely. What better time to attempt to average down on your losses?

I'm shorting Facebook right now and won't even think about closing out my position until next week (but most likely not until December with another lockup expiration in the pipe). I also added more to my position with today's gains and will do so again tomorrow if I see another opportunity. 750 Million shares unlocking on Wednesday is going to tank the share price to a new 52 week low but how soon? Maybe by Thursday or maybe two weeks from now? Hard to say exactly.

One thing is for certain though, whoever bought today was an institution of sorts that already has hundreds of Millions of dollars in the game. Only an idiot (Like Donald Trump) would be buying Facebook right now with the biggest lockup so far coming in 2 days when every other time its tanked the price to new 52 week lows. History tends to repeat itself.
GrahamValue profile picture
TangoOscar, do note that Graham's calculations don't predict a stock's future price. Facebook may remain at current or even higher levels for years.

Graham's calculations simply recommend the prices at which stocks should be bought, to be within the margin of safety for consistently making profits.

This is what Graham had to say about short selling:

"And selling short a too popular and therefore overvalued issue is apt to be a test not only of one’s courage and stamina but also of the depth of one’s pocketbook. The principle is sound, its successful application is not impossible, but it is distinctly not an easy art to master."
johnjakubowski profile picture
get the entire lockup expiration schedule - it goes into 2014, May
one monkey aint the show
they also have some serious RSU tax to pay in the next 6 months on all these exercises ( something like 6-7 BBBillion )
where 'dat ?
vorgriff profile picture
Excellent article!
GrahamValue profile picture
Thank you, vorgriff!
Patrick Collar profile picture
Nice Article. Graham's methodolgy imposed on Facebook shares highlights the chasm between investing and speculating.
GrahamValue profile picture
Thank you, Patrick Collar!

Graham's calculations definitely help in making rational decisions.
GrahamValue profile picture
Hello Patrick Collar,

A new table has been added that gives a comparison of the Facebook and S&P500 ratios. You can see it in the "Conclusion" section, just before the end of the article.

This should give a better idea of how Facebook compares against the general market.

Thank you!
eadragna profile picture
Would you reckon ZNGA is approaching NCAV?
GrahamValue profile picture
Hello Eadragna,

ZNGA seems to be selling under its NCAV of $2.43. But the company also seems to have reported a net loss in the last 12 months.
Link: http://bit.ly/TBptJ1 (automated unverified analysis)
12 Nov. 2012
I have not been the mentor of Warren Buffet, but I have been saying $5.00 per FB share for months. Only off by $1.00.
GrahamValue profile picture
Note that Graham wasn't predicting a stock's future price, Indy1.

He was only recommending the prices at which stocks should be bought, to be within the margin of safety for consistently making profits.
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