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TheStreet Open House

It's Time to 'Unfriend' Facebook From Your Portfolio

Stocks in this article: FBZNGALNKDGOOG

>>5 Favorite Stocks From the Pros

And while I'd argue that LinkedIn is overpriced in its own right, at least the model is there -- and so is the earnings growth.

Another issue comes in the performance metrics used by advertisers. While Google's software allows for some very precise cost/benefit tracking when using its AdWords pay per click service, many of Facebook's benefits are a little less tangible. How much is a "like" worth, for instance?

Until companies are better able to quantify the return on investment on their Facebook spending, the social network is going to be the first cost that gets cut when the economy hits a hiccup. We've already seen that last year in incremental declines in advertising spending on the site.

It's Expensive

I said that Facebook was expensive, and it is. At nearly $28 right now, the firm has a market capitalization of $66 billion, and a price-to-earnings ratio that's off the charts. Even if we throw out the most recent year's barely-there profit of 1 cent per share and use FB's best year of profits in 2011 to calculate its earnings multiple, the firm still trades for around 100 times earnings.

For comparison's sake, Google traded with a P/E of 77 back in late 2004, just a few months after its IPO. That means that shares of Facebook cost about 30% more than Google did when it was at the same stage post-IPO, when we've already established that Facebook should be trading for a discounted multiple compared to cash cow Google.

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Other valuation metrics spit out similar results. This stock isn't a bargain after falling 30% from its post-offering highs. Instead, it's still quite expensive.

Technical Factors Don't Look Promising

From a technical standpoint, Facebook looks "toppy" right now.

While shares have been rebounding well from a deeply oversold condition back in the Fall, they're losing a lot of their luster now. So even ignoring the fundamental flaws in this stock, traders should be thinking about an exit strategy for Facebook in March.

Facebook is in the early stages of forming a head and shoulders top, a price pattern that's formed by two swing highs separated by a bigger high. The head and shoulders indicates exhaustion among buyers, and after the run that Facebook has had in the last few months, those buyers have good reason to be worn out. From a sentiment standpoint, I doubt that many of them are high conviction buyers to begin with.

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