This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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

>>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.

>>5 Rocket Stocks Getting Ready for Blastoff

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.
2 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
FB $116.73 7.20%
GOOG $691.02 -2.10%
LNKD $129.95 9.30%
ZNGA $2.40 -1.23%
AAPL $95.03 -2.90%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs