Facebook Rally Not Surprising

 | Nov 14, 2012 | 2:05 PM EST  | Comments
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The lead headline in the money section of the USA Today says it all: "Facebook could be in for it today" -- courtesy of the gigantic lock-up expiration that occurred at the opening of trading. Why was the paper so sure that Facebook's (FB) stock would get hammered as 777 million new shares hit the market?

Well, how about because the bulk of the rank-and-file employees were allowed to sell after today's lock-up expiration and many of them have their life savings tied up in the stock. Or perhaps because there's a terrible record of past Facebook lock-ups, one that led to a 6.3% fall and a second one that led to a decline of 3.8%. Plus there was the sheer size of the deal, 777 million shares, a level of supply that the paper pointed out would be hard to digest, especially given the public's sour sentiment toward the stock.

So what happens? Not only does the stock not plummet, it rallies and rallies big. In fact, it's having its best day ever. What gives? Is that just the nutty ways of Wall Street? Are things so upside down that a stock goes up precisely because it is supposed to go down?

No, not at all. It makes perfect sense and here's why.

First, this is one of the most talked about, known about, and widely telegraphed lock-up expirations I have ever seen. That means many were braced for it and it didn't take anyone by surprise. When events are well known, they often don't affect you as much as when they take you by surprise.

More important, many of those who owned insider stock were extremely sophisticated investors. That means it is entirely possible these well-versed holders might have been able to hedge their positions, meaning they got short Facebook's stock to lock in a big gain the moment they were free to trade. In other words, they were simply waiting for the restrictions to come off so they could flatten their positions as they had already sold it ahead of time. They didn't want the exposure to the stock, and didn't want to take any chances of a further decline in the security.

That accounts for some of the buying, but surely not all of it given the big percentage move the stock's having, coupled with the hideous action in the stock market overall.

What else is behind the surge? I think there is a sense that after an initial period where Facebook was blindsided by the quick migration of traffic from the desktop to the smart phone, and the concomitantly lower prices for advertisements that mobile gets, management was able to re-adjust and find lucrative ways to capitalize off the trend.

Their strategies have allowed them to improve profitability and better harness and monetize the billion users who have signed up for the site, many of whom access it regularly.

I think Facebook's turned the corner here. Many of the companies I talk and listen to have recently embraced advertising in Facebook, as we just heard from luxury goods purveyor Michael Kors (KORS), as well as from advertisers as varied as Buffalo Wild Wings (BWLD), Domino's (DPZ) and Procter & Gamble (PG). The fact that there's so much buying today tells me I am not alone.

So, do you buy it up here? Everything seems to sell off in this market after a one or two day rally on good news, so you want to be careful after this gain. That said, if you don't own it already, I think you should take the plunge if it comes in.

Yep, today's action tells you the worst is over for Facebook and, perhaps, the best is yet to come.

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