Facebook (NASDAQ:FB), along with the rest of the stock market, has corrected almost 10% from the recent highs. Facebook stock was already under pressure. And recently yet another wave of negative headlines hit it. There have been renewed fears of regulatory restrictions and perhaps breaking up the company.
I don’t see this as a threat to equity owners. Facebook is a great company now. If they break it up it will become a bunch of great companies.
In June I shared a bearish write-up about Facebook stock, and shortly thereafter it fell 13%. Fast forward to today and we have a similar opportunity. The stock is selling off and falling into support. I realize that the gap extends to $236 per share but it is the zone that interests me. I don’t profess that I can find absolute bottoms. Investors who are looking to get long it, this is a decent zone to start.
Facebook Valuation Is Reasonable, Fears Are Not
This company is firing on all cylinders. Need proof? Even after the June dip, the stock rallied 50%. This week we came into a very red Monday on Wall Street and the headlines were heavy with virus fears. In reality it’s just normal price action because stocks cannot rally for ever without a break.
On the way up investors don’t panic, yet on the way down it’s like the end of the world. FB has a reasonable price-earnings ratio and a low price to sales. Very little froth built into its price now. There could be more room lower but not likely to be a massive crash. There will be buyers along the way
Technically this dip brings us back to prior pivot zones. Those who missed the rally the first time have an opportunity to jump on board now. The area around $240 has been in hard contention since May, so the bulls will fight for it. Below that there is even stronger support. Going into $220, Facebook stock’s volume profile says it has a lot of fans.
The bottom is a process more often than a hard line. This stock should at least be on the shopping list.
Current Fear Levels May Be Overblown
This is an emotional stock market, especially as we move deeper into an election season. There is a lot on the line, and Wall Street hates change. The election could have implications that will change a lot of the structure in the country, so investors are nervous. Proof of this is the elevated level of the VIX even as we made new highs. In fact, the last all-time high we made was on a record high corresponding VIX.
I contend that it is okay to have an elevated level of fear here. If markets were really scared, they would not be buying frothy stocks. On Monday when markets were falling almost 3%, momentum and expensive stocks like Zoom Video (NASDAQ:ZM) and Twilio (NYSE:TWLO) were up huge. Scared markets sell everything especially companies with a 170 price-to-sales. But even this week we have pockets of strength so there is a bit of rotation. This is a sign that investors are not willing to give up on the rally yet. They are just trying to find the next wave up. The U.S. leaders have the opportunity to calm the malaise this week. The Fed is in it to win it but more fiscal help is necessary.
Meanwhile Facebook’s value gets better as markets fall. It is hard to mess the potential of having over 3 billion active users. As great a company as it is, Facebook stock cannot rally alone. It will need Wall street to relax a bit. Until then conviction in any trade has to include an element of short term doubt.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.