The fundamentals versus who "cares about the fundamentals." That's pretty much sums up what I see going on right now in a bunch of stocks but I want to focus on the stock of Facebook (FB) . Here's a company with a stock that we trimmed for Action Alerts PLUS members because we thought we were being greedy with a triple digit gain and it just seemed too juicy a win to give it all back.
Normally with the stock down this much in one session it is tempting to start buying back the stock right here.
When you think of it, Facebook's stock sells at 19 times next year's earnings with 47% revenue growth and while perhaps the law of large numbers will make that number hard to repeat, it isn't like you are paying some pie-in-the -sky multiple for the darned thing.
So why not just hold your nose and buy? I think there are multiple reasons why but they can all be boiled down to a simple "it's just too hard" because nobody cares that the stock sells at a cheap price to earnings multiple.
Seriously, does anyone think that users will stop using Facebook or its Instagram site because it let someone misuse data that you gave a customer of Facebook's before the election? Does anyone say "Okay, because Cambridge Analytica was owned by some outfit n the U.K that might have ties with the Russians and definitely had ties to the banished Steve Bannon," I'm not going to post anything? Does any advertiser say "I am going to cut back my very successful ads because I know that if you filled out a survey a few years ago on Facebook that Facebook didn't protect you, even as I don't think you should expect that level of protection? "
No. The viewers are still there. The company is still growing. The advertisers are still there, they know it is where the customers are, which is exactly what we heard just last week from Clorox (CLX) CEO Benno Dorer, one of the most forward looking CEOs in the consumer packaged goods space.
The users, the advertisers, the rate of adoption, the money paid, those all come under the category of "the fundamentals."
Which is why I say that the issue here when it comes whether to buy or not buy the stock isn't "what will we pay for the stock of Facebook" given how well it is going to do. The issue is "I don't care about the fundamentals the stock's expensive at any price."
Now here's what I know historically about situations like this. Three things have to happen before it can bottom. One, the stock stops going down on headlines involving "soft" issues, so to speak, that don't directly hurt earnings. Two is that the company itself has to get ahead of the news flow and have a consistent narrative about how it recognizes the responsibility to do no harm, something that is not helped by Facebook spokespeople arguing the Cambridge Analytica story is not a data breach. And finally, the big profit taking's done and new buyers can't believe they can have an opportunity to buy the stock so cheap because of salacious headlines and foot in mouth executives.
When a stock is down 10 points you would like to say "come on, why not just buy." Remember, though, there are more people saying "I'm up so much, who can take this, why not just sell."
Right now the latter camp's in charge. No need to fight people who don't care about valuation. They are way too powerful an enemy to get in front of and let them exhaust themselves before you venture in. The worst that happens? You didn't catch this particular bottom. That's not too high a price to pay versus being blown out after a second or third or fourth day of negative headlines.