Is Facebook's Ride Over?
Trending tech stocks always generate a lot of interest. When the trending stock is called Facebook, everyone pays attention. Facebook is generating considerable free publicity for its upcoming "come and see what we're building" press event next week.
I'm sorry if I am not overly excited and counting the hours until Facebook spills the beans, but this isn't my first rodeo. In fact, if I recall correctly, original initial public offering investors are still down 20 percent from the IPO price. Maybe the stock has gained enough from the recent lows that it almost feels like winning, but Facebook has yet to show it is able to do more than sell stock.
Facebook shares many of the characteristics of Amazon.com, Pandora Media, and LinkedIn. They are great from a user point of view, but these companies have not demonstrated an ability to generate a reasonable return on equity.
Granted, investors have exhibited a saint's level of patience with Amazon as a result of revenue growth, LinkedIn had early troubles, and Pandora hasn't produced a bottom-line profit. But there isn't much difference between no income and almost-zero income from a shareholder's perspective. Additionally, Pandora's growth trajectory provides hope to long-term investors.
Two days ago, I wrote a column on how to short Amazon, and I believe the upcoming press event for Facebook may be the classic "buy the rumor, sell the news" type of event on which to short as well.
From a technical analysis and fundamental perspective, this is about as perfect as it gets for a short sale. Here are some of the main reasons:
The stock is in a downtrend. Yes, I know it may feel like an uptrend for those who joined the party after the IPO, but don't be fooled into believing there are not a lot of investors who would love to get out at or near breakeven.
Facebook faces competition for a wide variety of Web sites. Any of them may "crack the code" and begin taking social media market share away. Yahoo and Google come to mind quickly. Yahoo has "almost" got it right for a long time and is now led by a bright new CEO. One has to expect Yahoo! to take market share or at a minimum to price it in. Google is actively working on its social product, and the company is able to motivate users to use it for search-ranking gains.
The daily chart, at its current pace, begins to become extended and ready for a retracement by the end of this week. If the share price continues higher until the press event, the chart will have already made a DeMark Combo 13 after gapping higher. I love shorting this type of pattern because the winning percentage and edge are substantial. On the weekly chart, today's closing price lines up nicely with the chart's resistance level. The price may push through, but as a technical analyst I will view the move higher as a fading (sell into) event.
Investors don't often have the stars line up so well for a position entry, but we don't often see a stock rising rapidly with a forward looking price to earnings ratio over 45. Look to sell the news if Facebook climbs into the press event.
If you're a long-term buy-and-hold investor, this event won't mean much to you either way. But if you're active in allocating your capital, manage your risk with Facebook appropriately.
—By TheStreet.com Contributor Robert Weinstein
At the time of publication, Robert Weinstein had no position in any of the stocks mentioned.