You know the pros love to buy on weakness because it is the way they can buy in size without moving the market. Facebook (NASDAQ:FB) is providing the weakness in price created by mindless index selling of the tech stocks that takes the great stocks down with the weak ones. Portfolio managers love index selling because it creates bargain prices for stocks they want to buy. Let’s look at the fundamentals and technicals and come to some conclusions.
You know I love to go to the analysts first before looking at the fundamentals and technicals. They are the experts and we can’t ignore them because the portfolio managers pay them plenty of money for their research and listen to them. The portfolio managers don’t blindly follow analysts’ buy and sell recommendations because the portfolio manager, and not the analyst, is paid to make the buy/hold/sell decision. Analysts don’t buy, hold or sell any stock. They are not allowed to trade in the stocks they cover. Analysts don’t lose any money when they are wrong, but portfolio managers do. With those caveats, let’s look at what the analysts are saying.
Nasdaq.com shows 24 of 26 analysts have buys. Their consensus target is $167.50 and the high target is $192. It is trading at $152 as I write. The analysts’ high estimate for this year’s earnings is $5.27 and $6.86 for next year. If I put a P/E of 30 on that, I come up with $206. Our proprietary computer calculation is coming up with an implied return of 25% based on today’s price. Aggressive growth portfolio managers want that high analyst target of $192 to justify the valuation risk in FB. Based on the consensus target, the FB price is too high here, and that is one reason it is pulling back. The closer price comes to a consensus target, the closer price comes to a pullback.
Finviz.com shows all the overvalued fundamental metrics for FB. The market cap and the P/E are too high. The P/FCF is no bargain, but the P/C looks good as well as the lack of debt. The short ratio is low indicating that not many are brave enough to short this FANG stock. The FP/E looks good compared to the growth. The fundamentals look good and the only question is how cheap can you buy FB on this pullback? Our Supply signal will tell us when it is safe to buy. It will turn up on the chart below and start improving after the selling peaks to the downside. That reversal is a trigger signal for a swing trade.
The chart below looks great with uptrends in the 20, 50 and 200-day moving averages. This pullback from $155 looks like an opportunity to buy on weakness. The Supply signal is improving. We have just opened our 15 stock, paper, model portfolio and it includes FB. There is one troublesome flaw on the daily chart and that is the change in the relative strength trend from up to down (FB:$SPX on the chart). It is no longer an “Index Beater” on the daily chart. But on the weekly chart shown below, it is still is an Index Beater and the weekly signal is what investors use. The daily chart is for traders. Since we are looking to swing trade FB, which is in our paper model portfolio, we take off our investor’s cap and momentarily put on the trader’s cap. To swing trade FB, we will use the daily chart; to invest we use the weekly chart signals.
Our buy-on-weakness signal can be clearly seen at the bottom of the chart. It combines all of the three factors shown at the bottom of the chart.
First is the overall grade at the bottom of the chart. This SID grade goes from 0 to 100 and combines both fundamental and technical factors. Above 50 is a passing grade. We like to see the grade above 60. Above 80 and it is color coded green on our reports. So the first factor we require for the buy on weakness signal is a passing grade that is using both fundamentals and technicals.
Secondly we track the purely fundamental factor of implied return on this chart. It must have a positive implied return. We like to see 10% or more to be color coded green on our computer reports. With high PE growth stocks we want to see 20% or better. Now we combine the passing grade buy signal with the implied return buy signal to come up with our buy signal for Facebook. Then we look for weakness.
Thirdly we track this weakness at the bottom of the chart and it is called Supply. When Demand drops down to Supply we have our Timing buy-on-weakness signal triggered on our daily reports. To optimize that buy-on-weakness signal and reduce risk, we wait for Supply to reverse, turn up, start improving, and heading up to Demand above the line. That is the optimal, reduced risk, time to buy-on-weakness knowing that the sellers are done and it will take days before Demand peaks to complete a successful swing trade.
A picture is worth a thousand words. Here we have a clear picture of the FB buy-on-weakness signal. As Supply starts improving, it optimizes the timing of the buy-on-weakness signal and it can trigger a signal for a swing trade as well as a buy signal for an investment. Does it get any easier than just looking at this picture to find out when to buy on weakness? I don’t think so.
FB has pulled back from Demand into Supply triggering our Timing buy-on-weakness signal. Our fundamental, technical and timing buy signals are in place. FB has our implied return buy signal. Most importantly it has our overall passing grade, and that is using both fundamentals and technicals. Portfolio managers love it when dumb index selling takes the good stocks down with the bad. They swoop in to buy the bargains on weakness. Short term, the market is inefficient and prices are wrong. That is why you can beat the Index. FB is in our 15 stock, paper, model portfolio. (Click our free trial box to see the whole portfolio.)
Disclaimer: We are not investment advisers and we never recommend stocks or securities. Nothing on this website, in our reports and emails or in our meetings is a recommendation to buy or sell any security. Options are especially risky and most options expire worthless. We do not recommend options. You need to do your own due diligence and consult with a professional financial advisor before acting on any information provided on this website or at our meetings. Our meetings and website are for educational purposes only. Any content sent to you is sent out as any newspaper or newsletter, is for educational purposes and never should be taken as a recommendation to buy or sell any security. The use of terms buy, sell or hold are not recommendations to buy sell or hold any security. They are used here strictly for educational purposes. Analysts’ price targets are educated guesses and can be wrong. Computer systems like ours, using analyst targets therefore can be wrong. Chart buy and sell signals can be wrong and are used by our system which can then be wrong. Therefore you must always do your own due diligence before buying or selling any stock discussed here. We assume no liability for erroneous data or opinions you hear at our meetings and see on this website or its emails and reports. You use this website and our meetings at your own risk.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Most of this article was previously published to Daily Index Beaters subscribers on SA Marketplace.