Hope is not an investing strategy. Every decision to buy, sell, or hold has to be a deliberate and conscious ‘choice’ based on the investment thesis. In the Market Update 18/3/2018 we looked at how the market was at a neutral position and the importance of looking for news that would invalidate the investment thesis for individual stocks to recognize opportunity or take profits.
Monday, March 19, 2018 news broke that a company called Cambridge Analytica had accessed 50 million Facebook members data and used that data during the Brexit vote and 2016 Presidential Election. This news validated the concerns which had been keeping the stock price within a trading range. Within two days, the stock price gapped down $23 on five times the normal trading volume.
Is this an opportunity to buy, a warning to sell or a situation to hold?
First let’s look at the INVESTMENT THESIS. Facebook is one of a number of digital media platforms including google, Snapchat, Instagram (owned by Facebook) and Amazon which effectively uses your data to sell targeted advertising to marketing companies. There are three components to the Facebook business strategy.
- Quality Time vs Quantity of Time – If users care about something, they are more willing to view ads to experience it.
- Value Optimization for Business – Facebook is investing to drive better outcomes for advertisers for a given dollar spent, not the impression price, through better targeting and ad units which drives better conversion to purchases and leads to a willingness to grow advertising budgets with Facebook.
- Interaction Initiatives, augmented reality, virtual reality and machine learning to develop new participation platforms.
From the INVESTMENT THESIS we have to answer two questions.
- Are Facebook users going to stop using the product?
There are 2 Billion registered Facebook users globally who have intertwined their social communication between family, friends and business into the network. There are no alternative mediums which have the scale or scope of Facebook. - Are advertisers going to stop advertising?
The foundation of marketing is built on selling, this means making people aware of a product or service. If you don’t market, you don’t sell. Sellers go where the buyers are. Whether its’s a shopping mall, or a website, sellers need ‘traffic’.
TECHNICAL ANALYSIS
The stock price gapped down on 19/03/2018 and fell through a long term Technical Resistance level of $173 on massive volume as well as the 200 Day Moving Average (red line at $173).
Relative Strength – is very low and reflects an ‘Oversold’ condition.
Money Flow Index – this is interesting. Even given the massive volume selloff and price drop, the money Flow Index still reads 39, a stock is considered
‘Oversold’ at a level of 20, although in the past, 30 has been the lowest indication and each pullback to that level has had a positive reversal.
MACD – we want to see that black line curl upwards as an indication of a change in momentum and a reversal or ‘buy’ signal.
What does all that mean at moneywiseHQ
Every investor always has the power of Choice.
Buy – Buy low, sell high. The stock is at a nine month low. With 2 billion users and the second largest advertising platform (behind google) and a growth rate near 40%, on a metrics basis the stock price is cheap.
Sell – Cambridge Analytica validates the concerns of the past few months, there will be additional fallout, political hearings on privacy issues and maybe even regulation. This will all pass eventually, it always does but it will take time. In any broad based stockmarket pullback, the strongest stocks are always the first to recover. Selling Facebook and rotating into a strong stock without the ‘overhang’ is a strategy to quickly recover losses.
Hold – this will require patience. Ask two questions
- Is Facebook a ‘buy’ at this price?
When an investor chooses to ‘hold’, they are effectively choosing to ‘buy’ the stock at the current price. - Is the investment thesis still valid?
Have a look at INVESTMENT THESIS point 2. The entirety of facebooks profit comes from using individuals personal profiles to target marketing. That is, they effectively sell information to marketing companies so they can advertise to members, and their strategy is to find ways to do this even more effectively in an effort to generate a higher price per advertisement.
If the answer to both these questions is yes and there is patience, then ‘holding’ is a strategy.
Buy, Sell, or Hold – the power of Choice. In this situation each one is an equally effective and conscious strategy to profit or recover losses, but remember, ‘Hope’ is not a strategy or a choice.