- Meta Platforms (FB) is now a deep value stock.
- Major support has held on several occasions in FB stock.
- Consider going long with calendar spreads to be neutral now, but bullish later.
Shares of Meta Platforms (NASDAQ:FB) fell yesterday along with the rest of the market on a very ugly day. This brought FB stock back near the lowest levels it’s seen in the past several years. Certainly, volatility has returned in a big way, given the 5% clubbing.
Volatility, however, begets opportunity. Now is a great time to be a cautious buyer of FB stock.
A Closer Look at Meta’s Valuation
Meta Platforms is getting decidedly cheap on a valuation basis. Its current price-to-earnings (P/E) ratio sits under 16x and is approaching its lowest multiple in the past decade. It is also more than 50% below the median P/E ratio of 34.9x seen in the prior ten years.
Other traditional valuation metrics, such as price-to-sales (P/S) and price-to-free-cash-flow (P/FCF), paint a similar picture. FB stock is also cheap when compared to the S&P 500 P/E ratio of more than 20x and the Nasdaq 100 P/E ratio around 26x.
InvestorPlace contributor Dana Blakenhorn took a deep dive on the fundamentals in his recent article. He noted the trough valuations as well, even though the company continues to grow — albeit at a slower pace.
Certainly, the analysts like FB stock. TipRanks shows Meta as a moderate buy with a $279.47 consensus price target. This equates to a rather respectable 45% upside from current levels. The lowest price target is at $185. Therefore, “moderate buy” may be a slight understatement.
The Technical Take on FB Stock
FB stock has found major support around $185. Shares have bounced off this level on several occasions after briefly piercing it pre-earnings. That move was quickly rejected, adding to the validity of the horizontal support.
FB reached oversold readings on a nine-day relative strength index (RSI) basis before strengthening. Bollinger Percent B went negative, but has since turned solidly positive.
MACD continues to cling to the zero line after bouncing off recent lows. Shares are hugging the 20-day moving average. It’s also interesting to note the support level of $185 is exactly the same as the lowest analyst price target.
That said, look for this consolidation to continue over the next few weeks given the current market malaise. Eventually, though, FB shares will likely make a run to close the earnings gap around $240.
The Volatility View
Implied volatility (IV) has tempered dramatically post-earnings for FB stock options. Current IV stands at just the 50th percentile, meaning option prices are at the average price they have been in the past year. However, option prices are cheap on a comparative basis to historic volatility, which sits at the 67th percentile.
IV for FB options is also low versus the generally heightened levels of implied volatility in the overall market. The CBOE Volatility Index (VIX) opened today over 31 and is nearing the loftiest levels of the past year.
This lower regime of IV favors long volatility strategies when constructing trades. So to position for an eventual pop in FB, a call calendar spread makes probabilistic sense. Plus, the cost of the calendar spread trade is a mere fraction of the price of FB stock. Lowering risk is always a good thing, especially in the current market environment.
How to Trade FB Stock Now
Buy FB stock July $210 calls and sell FB stock June $210 calls for a $3 net debit.
The maximum risk on the trade is the net debit paid of $300 per spread. The maximum gain is achieved if FB stock closes near the short strike of $210 at June 17 expiration. The calendar spread is five deltas net long at trade inception. This equates to being long five shares of FB stock.
The trade structure also allows additional selling of weekly options once the June options expire to further reduce the initial net cost.
On the date of publication, Tim Biggam 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.