In two weeks, Facebook officially will not only be the hottest initial public offering ever to hit the stock market, but also a potential major trap for retail investors looking to make a quick buck.
Photo by Jodi Gralnick for CNBC.com
Facebook flag at JP Morgan
The story is familiar to market veterans: A hot company goes public in a much-ballyhooed IPO, only to disappoint when unwitting mom-and-pop investors find they can get in only after the big price gains already have happened.
When Facebook, the ubiquitous social networking site, hits the Nasdaq tape on May 18, it's likely that the early gains will be reaped by insider institutional investors and others who get in at the ground floor at the opening price.
For the retail crowd, it could be a different story.
"I don't even think God is going to get any shares on the IPO" at the opening price, says Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. "It would be amazing if anybody in the retail market got any. With this high-priced of a stock, they don't typically go to the little guy, they go to the institutional traders."
The Facebook IPOis expected to price between $28 and $35a share, and raise up to $12 billion. But that level is unlikely to last more than a few seconds once the stock opens, meaning outsiders could buy the stock high and then watch it drop after getting an outsized opening pop.
That's why market pros with retail clients are advising them to wait until the smoke clears before taking a stab. Even legendary investor Warren Buffett, who usually avoids technology stocks to begin with, told CNBChe's staying away.
"There's going to be a lot of overzealousness," says Andre Julian, senior market strategist at OpVest Wealth Management. "If you weren't one of the original people in there, you need to give it at least a quarter until some numbers come out, some earnings, until you see what the proper valuation is. Otherwise it's just a coin toss."
To be sure, Facebook's long-term prospectsare strong, as the company has a solid revenue stream and seemingly unbreakable business model, unlike many companies during the tech madness in the late 1990s. The momentum the offering generates could be enough on its own to counteract the market's typical sell-in-May-and-go-away mindset.
But dangers loom of another overheated tech IPO.
LinkedIn is the most recent template for the volatility that can come with such moves. The online social networking company for professionals saw shares skyrocket the first day of its IPO — nearly a year ago to the day of when Facebook will debut — but traders complained that the shares were nearly impossible to get.
A horrific drop in the stock ensued in the following months, only to be followed by a meteoric surge over the past six months.
Joe Kennedy, father of former President John F. Kennedy, once famously said that he knew to get out of stocks prior to the start of the Great Depression when his shoeshine boy started talking about the market.
For Dave Rovelli, head of U.S. equity trading at Canaccord Genuity, it was his bartender chatting up Facebook that gave him pause.
"When I heard that, that just showed there's going to be a lot of demand," says Rovelli, who believes patience will pay off for investors looking to get a slice of the Facebook pie. He advises anyone who tries to get in early to set trading limits.
On the overall, Rovelli likes the stock, but believes retail investors could get burned for being too aggressive.
"Every Tom, Dick, and Harry that's home with their (online trading accounts) is going to buy in the aftermarket. It's going to be like LinkedIn and have that big first-day up move," he says. "Don't chase it the first day."
