The angst around FB is indicative of the nervousness around the market in general, but we found few flies around FB’s quarter in general. In fact, the continued upward revisions in the forward earnings and revenue estimates of Facebook (FB) leave us quite comfortable with our 3% position. We did trim some shares prior to the 3rd quarter earnings release, but we continue to hold the bulk of our position.
Personally, an overbought stock market combined with growth and hedge fund managers that want to make room for the Twitter IPO next week, has taken some of the steam out of the Nasdaq leaders like Facebook, Netflix, LinkedIn and Tesla.
The tech leadership is showing some weakness, FB included but the fact that the leaders are weakening in unison, leaves me less concerned than if FB was weakening as the other names were working higher.
Forward Earnings and Revenue Estimates:
On the attached Excel spreadsheet, you can see the upward revision progression for yourself, taken from our internal spreadsheet here. (Source of the forward estimate data is ThomsonReuters.).
These estimates are as of 11/1/13 and updated after the q3 ’13 earnings report.
Upward revisions are an absolute necessity for a steeply-valued stock like FB. In fact our internal model now has a $111 “intrinsic value” on the stock, while Morningstar maintains their $36 value.
(Stop-loss: a trade through $39 – $40 on heavy volume and we would be out of the position. )
Technical commentary:
Here is Gary Morrow’s excellent technical commentary (written Thursday, 10/31) on FB, using the daily chart shown at the top of this page.
Facebook is under pressure for the fifth straight day. From last Friday’s high to this morning’s early low the stock has slid over 12%. Volume during the decline has been steadily increasing, especially during this morning’s news related volatility. FB began the session with an ugly gap lower open following last night’s Q3 earnings report.
Despite the heavy downside momentum in the early going FB has held in fairly well. At it’s early low the stock reached the $46.50 area. This level represents a 1/3 retracement of the powerful rally that began back on July 25th. Slightly lower is the October spike low which hit the $45.25 level. In the near term the $46.50 to $45.25 area should be viewed as a key near term support zone. If FB can base in this area, following the heavy wave of selling that has buffeted shares over the last three sessions, the pullback from the October peak may have run its course.
Conclusion: We’d add to our position at $42, although we would be adding the stock at a higher cost basis. In fact I’d love to see the low $40’s on FB, but per Gary’s commentary, $45 might be the low print for the stock.
LinkedIn (LNKD) gets interesting in the low $200’s too. (No positions). We are long Facebook.
This stock market is screaming for a 3% – 5% flush. Look at FB if we get a good flush.
Be careful out there…
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager