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Play of the Day: Social may grow; LinkedIn's price may not

|Includes: Microsoft Corporation (MSFT)

Guest Analyst: Stutland Volatility Group  (June 2, 2011, 3:12 CDT)

Symbol Analyst Target Price Target Date
LNKD $79.00 Nov. 18, 2011

Social Networking.

Bubble, not a bubble? Undervalued, overvalued? The questions are endless. And if anyone really knew, they would not be telling you.

The stock market is said to be forward-looking by 9 to 18 months. If that's true, investors must think LinkedIn (ticker: LNKD) is going to turn a massive profit and justify the multi-billion dollar valuation in 18 months. If not, and they're buying future growth 3 to 4 years down the line, I have a question: “Did you buy the stock as a stock market investor, or did you just become an angle investor in a start-up?”

For me, this is a Private Equity (NYSE:PE) investment. What type of multiple did investors pay for the stock? I will tell you: HIGH. I hate to admit it, but I am old enough to remember "irrational exuberance" and the Dot.Com bubble in the late 1990’s.

Back then, high multiples did not mean a thing. If a company made money, it was a bad thing. It did not have as much “upside” as a company operating at huge losses. How did that era of “investing” work out for us? Every firm was looking for someone bigger to buy them out. At these valuations, can anyone afford LinkedIn? Does anyone want it at these valuations?

I would leave PE investment to the PE guys. There is talk that a couple of PE firms are looking to go public soon. If you want to dabble in PE, look for those stocks first. These firms are run by professionals who know the PE game, and might be a safer bet than any company with no earnings and a lot of “potential”.

I don’t think LinkedIn can hit the high of nearly $122 it reached during the first day of the IPO. If fact, with LNKD currently trading at $79.00, we don’t see it (along with most social net businesses) moving much from its current price for the rest of year.

Play of the Day

Based on LinkedIn's (ticker: LKND) current market price of $78.63 and using a target price of $79.00, a target date of November 18, 2011 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date. Powered by TradingBlock's TradeBuilder

Stock/ETF Symbol LNKD
Analyst Target Outlook $79.00 by Nov. 18, 2011
Strategy (click for details) % Return at Target Probability of breaking
even or better
Sell Nov Iron Butterfly +145% 47%
Buy Nov Put Butterfly +145% 48%
Buy Nov Iron Condor +109% 50%
Buy Stock +9% 61%

* Subject to change due to changing market conditions.

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