Crowd favorite Facebook Inc (NASDAQ:FB) is set to announce earnings results early next week. As we head into the announcement, Facebook stock is enjoying a strong rally through October.
According to our research and models, FB shares aren’t without their risks as Facebook approaches its Nov. 4 report, but for now, those risks are overruled by a strong technical outlook.
The Good in Facebook Stock
Last quarter, Facebook stock rallied more than 15% in the month leading up to the earnings announcement. Then, those purchasing FB were rewarded with another batch of positive results as both earnings and revenue beat expectations.
Performance after the earnings announcement was muted, but that was no fault of Facebook earnings. Instead, you can blame the overbought conditions created by FB rallying so hard ahead of the announcement. The company merely played out the first half of the “buy the rumor, sell the news” scenario.
This quarter, Facebook stock has again rallied more than 15% ahead of the announcement, and for what it’s worth, we’re alright with that. Estimates for this quarter’s earnings reflect a slight increase in analyst expectations; the EPS consensus is 11% higher than last quarter.
For some perspective, analyst consensus has grown on average of 15% each quarter over the last two years.
Finally, our proprietary models continue to rank FB as a “buy” based on its continued technical strength and leadership in the market. Current ratings from our model have less than 18% of the S&P 50o companies in the “buy” category, leading us to expect continued market leadership from this technology giant.
The Bad in Facebook Stock
Honestly, there’s not much on the “bad” side of the FB trade — except for the current sentiment picture.
Currently, 90% of the analysts that are covering the company have Facebook stock ranked a “buy,” meaning that FB shares are what we refer to as “crowded.” That’s not a problem for a stock until something bad happens … like missing on earnings.
For now, though, we believe that Facebook’s ability to overcome analysts expectations will outweigh the negative of being crowded with bullish investors.
What Should You Do?
Hold Facebook stock if you’ve got it, but don’t buy more before next week’s earnings. The stock’s vertical rally has left it in some light air, meaning that it will be harder for FB to extend itself higher after earnings.
We expect to see a positive report that will be met with some sideways consolidation, and we expect to see Facebook stock touch the $100 level after earnings, which would be a good entry for new or additional positions.
But we don’t think that FB shares run the risk of running away from the market, so just be patient.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
