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TheStreet Open House

Investors Shouldn't 'Like' Facebook at Current Price

Stocks in this article: FBLNKD

LinkedIn (LNKD) also has a sky-high valuation.

Its financials appear stronger than Facebook's, but it's not easy to make money buying companies with nosebleed P/Es. LinkedIn's forward P/E is an eye-popping 85.

As a general rule, stocks with P/Es of more than 20 underperform stocks with P/Es of 20 or less. That should tell you everything you need to know.

If you buy growth companies with enormous P/Es, you are starting out with the odds against you. In order to have an edge with growth stocks, you need to know more than the person who's selling the shares to you.

If you can't articulate why you're smarter than the seller of the shares in any company, you could be the one who is being outsmarted. If you're going to invest in social media companies, than do so by being smarter than the seller.

To get a real edge, have the patience to buy when the forward valuation justifies the price and buy on dips. In the outstanding book Analysis of Financial Statements by Pamela Drake and Frank Fabozzi published by Wiley you can learn more about what you need to know to gain your edge in the stock market.

I'll be the first to admit that the book isn't nearly as fun as reading updates by your friends on Facebook, but there's no free lunch on Wall Street, and you can bet your counterparties are putting the time and effort in to make money.

For those who want a buy price, consider scaling in slowly in the teens. Facebook's current stock price is $26, so you may get bored sitting and waiting for it to meet your entry target. But as I am fond of saying, it's much better to experience boredom than losing money.

At the time of publication, Weinstein had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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