2018 was a year that Facebook (NASDAQ:FB) investors would like to forget. FB stock fell off a cliff following self inflicted wounds. And the negative headlines didn’t stop. All told, Facebook stock fell 45% from July highs to December lows.
Luckily this year is a different story, FB stock is up 38% year to date — double the S&P 500. After the initial plunge, management has been on a campaign to repair its reputation. CEO and co-founder Mark Zuckerberg has even called for government regulatory intervention. At the moment, FB seems to have successfully deflected the attention and passed the risk off to all social media stocks.
The trick seems to have worked as the stock is up massively from December. But it’s not done yet and therein lies today’s opportunity.
Earnings Season Is An Opportunity
As we approach another round of earnings, expectations start to build again in mega caps — especially tech stocks. The last round went very well for Facebook and I’m betting on the same happening when FB reports on the 24th.
However, there is short-term risk because there is never a guarantee around earnings. The short-term reaction to the headline is always a binary event. We don’t know what management will report and more importantly we don’t know how investors will react to those numbers.
Luckily the general sentiment on Wall Street has recovered from last year’s drubbing so it is easier for traders to buy any good news. Facebook investors are more open to buying the good news.
Today Netflix (NASDAQ:NFLX) will report its earnings after the bell and this is a special opportunity for Facebook traders. Since they both are part of the famed acronym FANG, then I can safely assume that Facebook stock will move in sympathy with the of action on Netflix stock.
In fact, a bet on any of the FANG — FB, Alphabet (NASDAQ:GOOGL), or Amazon (NASDAQ:AMZN) — would be a safer bet than on NFLX earnings.
I can hold a long Facebook stock here for the next two weeks for a tactical trade but one that has fundamental basis. Meaning that even if it temporarily falls on headlines, I can still hold it for the long term and profit. They say it’s not a good idea to turn a trade into an investment but in this case it can work.
Fundamentally, FB is cheap as it sells at a 24 price-to-earnings ratio. This is five times cheaper than NFLX or Salesforce.com (NYSE:CRM) to name two growth stocks. It is also important to note that FB has the attention of over a billion users on a daily basis and for hours at a time. This is potential that is almost foolproof.
There is also a technical aspect of this trade. They say on Wall Street that stock charts like to fill open gaps and FB has two of them. One is 15% above current price and the other one 15% below. The current positive momentum in the stock suggests that FB will have the opportunity to fill the upper one first. So there is a good chance that it rises to $210 per share before it falls to $150 per share.
Trading FB Stock
The bullish FB thesis here is simple. The macro-economy is healthy and still favors higher stocks. Within that thesis, FB behind its strong fundamentals will continue to rally. If stocks are higher in the future then so is Facebook stock.
So in summary, I would own the shares here for a short term tactical trade that is also a valid long term thesis. Consider it a Plan B in case earnings disappoint.
Experts on Wall Street agree as almost all analysts who cover the stock rate FB stock as a BUY while it still trades below their average price target for the stock.
For those who prefer to use options, I like selling December $125 put options and collect $2 to open. This is money that goes into my account today. If price falls below my strike then I break even at $123 per share. Meanwhile, all I am long FB with a 30% buffer from current price.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
