In May I suggested you trade $FB the first day, but stay away from it a an investment. After six months, the lockups are over and the chart looks good, so, for those of you dying to but $FB shares this may be the time, you have the green light medium term (It has gone up quite a bit already, but this is not a trade, is an investment)
So, you thought I was gone for the year? No way, I said I will try and here it is:
First up, CF, a fertilizer company, no bullshit there. The first graph is the weekly and you can see how good it looks, with the Trix turning around(red line):
Then you look at the Daily and you see the trend is broken, which gives you a high probability of an upside. I don’t like Friday’s to invest, but this one looks good medium term
Next up is EMC, an old favorite, in the weekly chart, you can see how the Trix is turning nicely, or at least bottoming:
Then, in the daily chart, you can see again how the trend was broken today, suggesting a nice rally by EMC in the next few weeks:
Then there is another old favorite, Seagate (STX), reported this week and as you can see, despite the guidance, it held up well. And that Trix bottoming augurs well for the shares.
But more interestingly, the daily shares look much like CF and EMC, a downtrend broken and the shares ready to rise.
Finally, a short term trade in Panamerican Silver $PAAS borrowed from Dan Fitzpatrick, this stock is showing a Bollinger band squeeze and a Trix that is going up in the Daily chart, while the price broke resistance today. That is a good triple whammy. A good three to four day trade. At the first sign of weakness, get out!
Ok, charts are back, I make no promises as to regularity. Just interesting things.
I currently like technically: $AAPL, $FIRE, $ASPS, $OCN, $V, $YUM, $CMG
But for today, only two charts, the first, it had to be $AAPL, it seldom gets any better than this for a trade:
Look at the Trix, every time in the last year that $AAPL’s TRIX has done that it has bottomed. I think we bottomed today. So, if you were thinking of going in, technically there is no better time than now.
The other one that is ready today is $FIRE:
I love it when a stock drops linearly like that and then it breaks the trend and all oscillators are pointing up!
So, the Facebook IPO came and went and it certainly did not go the way Wall Street thought. Obviously demand was not as “spectacular” as it was claimed to be. Shares were sold at US$ 38 per share to those lucky (or unlucky) enough to get some. The company sold 421.2 million shares, increasing the number supposedly because of the strong demand. But let’s see what happened:
A total of 580 million shares traded on the first day. That means that many shares were sold more than once as investors tried to get on and sold before the close. Above you can se the “five-minute” graph. Each bar represents 5 minutes of trading. At the beginning, within the first five minutes there was an attempt to have the shares “pop” but they could not be moved beyond $44.7 per share. (A) above in the chart. After that, it went down to $38, the IPO price, point (B) in the chart.
Here we note the following: Whenever there is an IPO, the main broker or underwriter, in this case Morgan Stanley, is given a certain amount of money to support the price at the IPO price. Thus, they will buy at $38 until this amount is exceeded or the shares recover above the IPO price. This happened in points (B) and (E) in the chart above. The amount allotted was large, I could see “live” that there was a constant order to buy 9.999999 million shares whenever it hit $38, or at least US$ 380 million. By the end of the day in (E) that number finally went down, at the end it was like 3 million shares. But there were, in my calculation, 36 million shares traded at $38 in the last 40 minutes. That is about US$ 1 billion.
As you can see in the chart, there were two attempts during the day to have the shares close above roughly $41.6, but they were not successful. The stock kept drifting down and stayed for about 40 minutes at $38, with a slight push at the very end, to close at $38.23.
I believe that shares will eventually break the $38 level on Monday, but I may be wrong. What is important here is to understand supply and demand going forward.
Lots of individual investors want Facebook shares, they think it will grow, even if it is expensive. I would bet individuals were mostly buyers on Friday. Most of these shares are unlikely to come to market unless the stock drops sharply. People will hold on to them. But a lot will depend on whether it goes up or down from here.
1) Suppose it holds up above $38. In this case, I would wait until the stock breaks $41.7 to buy. Why? Simple, if 570 million shares traded on Friday, there are a lot of people losing money who may regret buying and are ready to sell if it gets back to their price between $38 and $41.7 (You could argue it is $44.7, but little volume was done there). Thus, until all of those that want to sell are “cleaned up” by demand, I don’t expect $FB shares to rise significantly above $41.7
2) Suppose it breaks down the $38 level (I think this is the most likely scenario, but I could be wrong, it happens). In this case, you have to wait to buy for the stock to find a base below $38, which could be all the way down to $30, but it will still have a hard time to get back up, because everyone between $41.7 and wherever it bottoms is a loser. Many will be ready to sell if it goes back up to their purchase price.
The “good” thing about $FB is that a lot of individuals want to own shares and those will not go back into the market. Thus, slowly the supply will dry up. Since there are only 420 million shares, it would take 4.2 million individuals buying 100 shares, or 800,000 buying 500 shares to dry up the offer. And until 91 days go buy, no new shares will come to market. So, one could expect a “pop” before then if the supply dries up.
Thus, what may happen is that there is trajectory 1) below, where it never breaks below $38 per share and it starts moving up as it cleans up all those that want to sell. Once ot exceeds $41.6 that is the point to buy. Why? There are no sellers left!!! The stock could rise sharply from there as long as more supply does not come to market (Which will happen in 91 days, be careful)
But I think the more likely trajectory is the second 2): The stock will break below $38 tomorrow or Tuesday and will go lower. Slowly, it may take days or weeks, it will start building up, buying out the sellers. I would also buy at $41.6. Why? Because until it breaks that magic number, it will not “pop”. In fact, if it does not get to that number before the 91 days of the first lock up, the it will take much longer for $FB shares to pop above $41.6. It will be dead money until then.
That’s my take. Remember, I still think it is too expensive and should be valued less, but supply and demand will dominate trading, not fundamentals. Good Luck!
Note added 5/17/2012 Price of the IPO set at the high end $38 per share
Note added 5/16/2012: Number of shares to be sold raised by 94 million
Note added 5/14/2012: Price of IPO raised to $34-$38, getting expensive here….
Since I have been involved with buying stocks, I have not received as many inquiries as I have on whether to buy Facebook shares or not when it comes public on May 18th. In fact, in many cases, people don’t even want my opinion on buying them; they want my opinion on how much to buy, as if it were a sure thing that Facebook shares will be a good investment.
In what follows I describe what I think about the Facebook IPO and while I am a little bit weary of people jumping into it right away.
The Google Comparison
While everyone compares the Facebook IPO to Google’s, I disagree. When Google came public, there was hype months before the IPO, but as the IPO approached, there were many doubts thrown into the future of Google. The negative sentiment was such that the price of the IPO even had to be lowered because of the low demand in the “auction” part of the book. Originally, the plan was to sell the shares at US$ 121, but the price was lowered to $85 per share and the number of shares to be sold was actually reduced.
This was actually good for those interested in the $GOOG IPO. The stock did not “pop up” sharply on the first day and began going up more gradually, giving investors plenty of time to get in if they wanted to as shown below:
As you can see, the stock, sold at $85 per share, opened at $100 and stayed there for the rest of the first day. It then rose to about $112 on the third day, went back down to $99 and began a steady rise that took it to $200 in less than two months. Today $GOOG shares trade around $600.
The Netscape similarity
What the Facebook IPO really reminds me off, is the Netscape IPO. Netscape, a company that made the main Internet browser at the time, but had few revenues, scheduled to go public in August 1995, saying that it would sell its shares at $14 per share to the public. The hype and the frenzy was such, that everyone wanted to get some shares. The bankers then decided to price them at twice the original price, selling them at $28 to those lucky enough to get their hands on any shares. Most individual investors got only 100 shares, a small $2,800 investment.
On the first day of trading, the shares of Netscape opened at more than twice the price, at $56, rising fast to $75, before settling back down to near the opening price, closing at $58.25. Anyone that bought that first day near the high had to wait two months to see the price above the first day’s high, but within four months had doubled the money, as can bee seen in this graph:
By 1998, Netscape had lost market share with Microsoft Explorer overtaking Netscape, the stock price dropped below the IPO price, before AOL bought the company for a higher price.
The Netscape IPO marked the beginning of the tech bubble, which ended badly in 2001. (The Nasdaq reached 5,132 in March 2001. Today, eleven years later; it still sits near 3,000, 40% below that high)
With almost a billion users, there are no companies that can count on so many eyeballs day after day. This huge number of users translates into strong revenue growth, in 2007 Facebook had revenues of US$ 272 million and in 2011 it had revenues of 3.7 billion, a jump of more than ten times. In 2008 it lost six US$ cents per share, while in 2011 it made $0.46 per share.
These earnings come mostly from advertising (US$ 3.2 billion in 2011), which doubled in the last two years, but increasingly, Facebook makes money from fees from gamers and the like (US$ 500 million in 2011), which has increased 500% in the last two years.
There are two concerns with Facebook: First, from the last quarter 2011 to the first quarter 2012, revenues were flat and earnings per share were down. Earnings were down because of the company spent more on research and development, which could have been made on purpose to make comparables look better later on, after it goes public.
But longer term, the revenue model for Facebook is a little less clear. As Facebook itself says it in it’s filing, it has no clear revenue model or monetization of its webpage for smartphones. As more and more cellphone users move to smartphones which can surf the web, fewer people click on ads. The overall Internet model seems to be switching from search and ads on computers, to using games and apps on smartphones. Facebook is trying to promote the latter, but they are clearly not as good yet at generating revenues from this, compared with simple ads in a computer.
But these are longer-term issues. For now, a billion users is a lot of users and that is what people are fixating on: Can Facebook keep them, sell them things and make even more money?
That, my friends, is the question. We don’t know the answer yet.
Facebook, according to the filing, has or will have 2.9 billion shares on a fully diluted basis, as it is clearly stated in Note 2 of the IPO S-1 filing (page F-21). Here I should make a note: This number is difficult to find in all of the hype about the IPO, instead one hears that at $35 per share the company would be worth US$ 95.95 billion dollars. I have no idea where this number comes from, but it seems to have been propagated in the web. Using the 2.9 billion shares from the S-1, at $35 per share, the value of Facebook would be US$ 161 billion, no question about that.
What this means is that the company would be valued as follows:
At the low IPO price of $28 per share US$ 82 billion, Price/Earnings (2012)= 45
At the high IPO price of $35 per share US$ 103 billion, Price/Earnings (2012)= 56
And so that you have a quick table to look up on the first day of trading, here are the P/E’s for 2011 and estimated values for 2012 at different prices all the way up to $150 per share, which would be truly crazy:
To give you an idea, $AAPL’s P/E is currently 14, while $AMZN at the other end is at 184. Both companies have a legion of followers, but somehow they like more the low margin, mostly US-centric business of $AMZN, than the high margin, more international business at $AAPL. Go figure.
However, at a P/E of 200, Facebook would be worth 50% more than what $GOOG is worth, which seems very hard to justify. Below is a table of the current market caps and revenues of $AMZN, $AAPL, $GOOG and $FB:
I think it would be hard to justify that $FB is worth more than $GOOG today, which would say no more than US$ 200 billion, that implies a price of no more than $75, or twice the upper range of the expected IPO price (Which could be increased).
Can I get shares at the IPO?
That is the first question I get, even from people who have never owned a stock before in their life. The answer is likely to be no, unless you have an account with any of the 33 brokers involved in the placement of the IPO (see the Prospectus), it is unlikely that you will get any shares. Those will be reserved to the good clients, some individuals, some institutional.
But even if you do have an account, it is unlikely you will get many anyway. Facebook may have 4.53 billion shares, but the owners are not selling just yet, they are selling some shares to raise money to continue operating. But they will only sell 333 million of them. That is less than 7.4% of the total number of shares.
With the hype and the frenzy, I think it is unlikely that any individual, unless you give thousands in commissions every year to your broker, will get more than 100 shares (If three million people ask for shares that is 100 shares per person, give or take). At the high end of the pricing, that would be all of US$ 3,500. But I imagine most of you want to invest more than that.
Note also, that the fact that only 333 million shares will be sold implies there will be scarcity, which will help drive the price up when it starts trading.
Finally, the range from US$ 25 per share to US$ 35 per share is not written in stone. The lead brokers could decide to increase it
So, what do you recommend?
Well, I think this is a very high risk game. Without knowing a) At what price it is sold to investors at the IPO, b) At what price does it begin trading on May 18th, I have no recommendation for you.
First, the brokers could increase the price even more, which would only increase the hype and the frenzy. Second it could open at any price and I can’t possibly suggest that you buy a stock if any company at any price. So, I will not know the answer until May 18th.
But I can tell you what I think will happen.
Look at the two charts above for Netscape and $GOOG. Even though the dynamics were so different, one was full hype, the other was not, they had similarities. They “popped” at the beginning, went down and then slowly began rising.
Thus, there are two things people can do:
1) Play the crazy pop: This is only advisable to those that have access to real time pricing and can place orders automatically in electronic fashion. Try to buy Facebook shares as soon as it opens and sell on the same day at the sign of any weakness. And I do mean “any” weakness, just the smallest hint. If on the first day Netscape traded, you had done this, you could have bought at say $60, sold at $85. With $GOOG you would have not made much or lost much.
2) The more reasonable approach, is not to do anything the first few days. Let the stock “pop”, let the bubble deflate. Once it starts settling down, wait for it to go back to the original high of the “pop”. You could buy there.
This is an old trick of technical analysis. If a stock starts trading at $60 and it pops to $90 and then goes back down to say $70, there will be a lot of people who bought between $80-plus all the way up to $90. At $70, they are losers, but they don’t want to take the loss. Buyers have to come in and buy stock from all those that bought it between $70 and $90. Until all of those guys are cleared, the stock will not go up.
In either of these two cases you will be buying the stock at a fundamentally “expensive” price. But between the hype and the scarcity, it most likely will work until people start perceiving that Facebook will not grow as fast as they thought.
And if the price goes truly crazy, hey, why not buy $GOOG or $AAPL instead?
Well, I briefly revived the blog because I like that triangle pattern $AAPL was making and it certainly has worked out well (Click on it to get a larger image):
Well, while the market has not been doing well, $AAPL has and the chart says that it will keep going. After today’s move, it may rest a little bit, but I think that after hitting all time high, it will continue to do that over the next three or four weeks. This is a good time to be an $AAPL investor. The chart says so.
I know, I said I don’t have much time for this. And I don’t, but $AAPL is showing such a powerful chart, I had to show it to you. Tomorrow, the market may go down, it is up three days in a row as Europe continues to commit Eurokiri, but if $AAPL goes down it should only be temporarily, in both the daily:
and weekly chart:
it looks simply spectacular! Breaking the triangle and that weekly TRIX, very nice.
As a bonus, look at $DLTR, hitting highs daily in this horrible market:
And I am still holding on to $VRUS, and yes, $VOD was bad, but it has a yield of 7.69%, it will bounce back.
I know, I have not posted anything in a long time.
There will be no charts today either.
The market was wild last week. In my experience these recoveries are never up in a straight line, so, be prepared.
This is the time to trade, but take profits, don’t keep any trading positions on weekends and as few as possible overnight.
If there are some stocks you want to buy to keep, this is your chance, buy on dips, that Visa ($V), Apple ($AAPL), EMC ($EMC) stock is cheap now. It may go down, the best day to buy is the day you feel bad about the market.
What am I doing?
Trading a little bit of $AMZN, $AAPL calls, sold some $NFLX puts, bought some $VOD (because of the dividend, it is 7.7% plus one more dollar in an unannounced dividend, will make it 10%, this will support the stock in the future)
And will likely short $RIMM next week.
Going ahead, I worry about Europe, in the next 12 months we will have a crisis there and markets will not like it. Neither will we!
I still think $AAPL is sure to go up before December and I finally had the guts to buy $VRUS, it went down $25 this week and then it went $25 this week also. Not for the weak of heart!
When so many charts are looking good, it is a good sign for the market.
Look at the Nasdaq:
It is a very pretty chart, the Trix is trending up, the Bollinger Bands are compressing and the only negative thing is that there is resistance overhead. But resistance is meant to be broken and I think the Nasdaq will push thorugh it.
So, what looks good?
Well, so many things do, let me give you a few, start with NFLX:
Yes, the stock has been flying, but I think it will continue to do so, nobody is close to $NFLX in downloads and subscribers. The Trix is positive, it is ready to break out, it could easily move $20 dollars in no time.
Look at Teradata $TDC:
Same thing, the bands are compressing, the Trix is up, it should continue moving up.
Then there is GRMN, winding like a coiled spring, ready to burst out of the squeeze in those Bollinger Bands, one of these days it will do it, I hope I can ride it:
I could show you many more, there is $IBM, which already reported, why not then go for $ORCL:
There are many more, like MELI, already flying, IBM, EMC, CTXS, AXP, BA (This one looks great!), ILMN, RAX, QCOM and PCLN.
Take your pick, the market looks good, enjoy!
(just think, I did not even mention $AAPL!)
The market does not look great, the question is whether there is further to go down or we are ready to bounce.
Today, only today, I lean towards bounce. Why? Earnings are here and some stocks are giving signs of life.
The S&P500 does not look good:
In fact, the parabolic SAR (Dots) just gave a sell signal. The Trix looks awful too. But certain stocks, including $AAPL , which I will not show because it has yet to give a buy signal look good.
The best looking one is VMWare ($VMW), shown below:
This former high flier is showing all of the signs of a rebound, Bollinger Band squeeze, breaking resistance and moving up with a very positive TRIX.
Veriphone ($PAY) has a spectacular chart:
The Trix says buy at a level where it has given very nice buys in the recent past. Look at the channel that $PAY has made during the last year, it seems as if yesterday it established another low and it will bounce back strongly from here. Only the Parabolic SAR is still in sell mode.
I may be wrong, but today’s market will confirm the bounce as earnings season starts.