Most investors are at a loss with the price action on Wall Street of late. It seems erratic, especially if they’re following headlines. The expert advice hasn’t been too helpful, but that’s because these are unique circumstances. Therefore, investors sold all stocks down in panic. Even the great ones like Facebook (NASDAQ:FB) or Apple (NASDAQ:AAPL) suffered heavy casualties last week. Today, we will break down the opportunity in FB stock into more manageable pieces.
When the price action seems erratic, it is best to dig deep into the tool box. Fundamentals alone may not be enough to help navigate the short-term gyrations.
As a remedy I draw on the fundamental clues and the technicals in the charts. They say “price is truth” and that’s where it exists. Using actual data from past history gives us the best odds of success in this challenging trading environment.
The groundwork for this latest correction started straight out of the pandemic. The rally out of the March 2020 lows was too incredibly strong. This raised stocks to extreme levels thereby creating sharp wedges. Those are susceptible to sudden violent drops. Even great ones like FB stocks became too high even though not expensive.
FB Stock Fundamentals Enjoy Solid Footing
Luckily, the Facebook fundamentals are as solid as they make them. The financial metrics tell a story of success, but not without having a bunch of critics. The success of the company is its own worst enemy from the public opinion perspective. But, the income statements are impartial and they are bullish.
Revenues now are 10 times the size of what they were in 2014. Management has consistently grown sales and gross profit at a blindingly fast pace. Net income last year was $40 billion, and that’s impressive by any stretch of the imagination. In spite of that, Facebook stock is still statistically cheap. It has a P/E of 21 and a price-to-sales under $8. That is about 25% cheaper than Apple even.
FB critics must have other notions that have nothing to do with business. Since they have billions of users, they upset a few. But ignore the noise because all dips from shocking headlines were buying opportunities. Speaking of which, this brings us to the opportunity now from the technical perspective. If we agree that the fundamentals are beyond reproach, the charts suggest having support below.
There Are Buyers Lurking
FB stock just shed more than 20% of its value in a couple of months. This brought it back to the breakout level from last March. When stocks fall into pivotal zones like that, they usually find buyers lurking there. This would not be an absolute floor if the indices continue to correct.
Moreover, this week management will report earnings. Sadly, the short-term reactions to those headlines are completely binary. They have almost nothing to do with the actual quality of the report. Case in point what happened to Tesla (NASDAQ:TSLA) which broke records, and the stock fell 11%. Conversely Robinhood (NASDAQ:HOOD) delivered an absolute stinker and it rallied 10%.
Therefore, investors need to keep an open mind this week. The strategy would be to buy the dip if it comes, else we risk a wild card ending. The better trade is to wait for the outcome, then trade it with a bit more knowledge.
Patience is key when we are dealing with nervous markets. The fundamentals have not changed in weeks, yet volatility has increased folds over. This is perhaps coming from the fact that the Federal Reserve is embarking on its quantitative tightening program.
Last week, the Fed told us that they will end the QE this March. They also suggested that they will start raising rates at that same time. Remember that the Fed is pulling back the reins because the economy is doing too well. This is hardly a situation we need to worry about for stocks doing well or not. Companies are delivering incredibly strong results, including this one this week.
My bet is that management will crush last year’s results, but that would not guarantee us a positive reaction. In the long run strong results will matter, but on Thursday morning it is mostly about expectations not quality.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.