May 8th, 2012
in Gary's blogging
My son “K” asked me yesterday what I thought of the Facebook IPO on May 18th. Basically I told him that I agreed with Buffett. Warren Buffett thinks Apple, Google, Facebook stocks 'too risky'. But that is partially because I have played the game of chasing IPO's in my charismatic years of lusting for diamonds. Now in my experienced life of having been screwed a couple of times by Mr. Market, I'll settle for my 'better-than-average' profits in a conservative fashion and let the young bucks show me how it is done. I also mentioned to “K” in the same breath that I wouldn't buy anything for 60 days, but if I had too I would buy McDonalds (MCD).
Interesting mouthful of words just off the cuff. Having thought about it overnight I thought it would be best if I had explained my lack of specificity and limited content comments in greater detail.
Let's start with the financial aspects first; what is Facebook really worth? In a news article from Reuters, they quote several sources with views of speculation, validity and lack of optimism.
Michael Yoshikami, chief executive of YCMNET Advisers, a California-based wealth management firm said recently, "For the valuation that people are going to be paying for this name, they're going to probably be overpaying by a third because of the optimism related to just the name.
"The hypergrowth is probably over'" said Michael Pachter, head of research in the private shares group at Wedbush Securities. "The low-hanging fruit of the Western developed world has already been penetrated to a large extent...It's just kind of obvious that they're not going to ever get every single person that lives on the planet."
"I worry that the billions of dollars of revenue that they generated last year aren't as solid as they need to be because the advertisers who spent the money aren't as thrilled with the results they got for it," said Nate Elliott, an analyst with Forrester Research.
Reuters goes on to say:
“Facebook's explosive growth has come as first-time users joined the social networking site in droves, which in turn enticed even more to join up. The world's biggest social network now has 845 million members in more than 70 languages.
But with signs that membership growth is slowing, analysts say Facebook needs to get existing users to spend more time on the site and advertisers to spend more money. In the last three months of 2011, Facebook's total monthly active users rose 5.6 percent versus 10.5 percent in the last three months of 2010. Compared to many established tech titans, from Google to Apple to Microsoft, Facebook's current business is tiny.”
My issue is that Facebook is preparing to enter the market place with a valuation that will dwarf what Google did in 2004 and they don't sell anything that you can put on your fireplace mantle next to grandma's urn. Nothing tangle in the conventional thinking of services or products anyway.
It is going to move up or fall below the opening $44 mark? There is a 50-50% he would get it right but I don't like odds like that and it is the reason for mention McDonald's (MCD). McDonald's was the first thing off my head and probably not the best selection of stocks to invest in, certainly not the worst either and it is a safer bet. The P/E is not exactly low at 17.80. The Motly Fool had an interesting article: Fast-Food Wars Exposed: Which Stock Should You Buy?
Another interesting article which point out that Chipotle Mexican Grill may be a better choice but not for the P/E which is running at 47.9%. Personally, I'll stick to my original choice, I'll have a Big Mac please!
“But for investors, not all burritos, burgers, or beef sandwiches are created equal.
McDonald's is a blue-chip stock -- and justifiably so. The company is swimming in money and knows its business cold. . . . . Annual revenue growth for the company was 12% in 2011, and net income margin was top of its class at over 20%.
However, that 12% growth was leapfrogged by several younger and (sorry!) hungrier companies . . . . these have a much stronger emphasis on fresh ingredients and relatively healthy menu offerings. A company that has had consistent success with this approach has been Chipotle Mexican Grill (NYS: CMG). CMG hit the market at $22, and it's never looked back -- the stock currently trades at nearly $420 a share, which is close to its one-year high. There's little indication it will lose ground, as revenue is zooming ahead (at 24% year over year for 2011).
In terms of profitability, anticipated EPS growth stands significantly higher than its rivals at 61%. That's three times the level of a roughly comparable rival like Panera (NAS: PNRA) . Meanwhile, Chipotle's margins are close to 10%, outpacing most restaurant chains that aren't McDonald's. The only slight minus is its popularity; now that investors have run up the stock, its PEG ratio is one of the highest in its peer group.”
Lastly, why I would wait 60 days (actually closer to 50) before I would dip my toes in for a long investment. For my regular readers, you are all aware of my “Sell in May and Go Away” rants here, here and here. Traditionally, June is the lowest month in market gains prior to the summer rally normally expected in July. Any investments in June will certainly be better than in April or May. Of course if you wait until September, your selection will be even better.
Then there are the Black Swan events that seem to be occurring at regular intervals lately and another could come at any time. That in itself is not a good reason to avoid jumping into the market fray and swim with the sharks, but something to consider when investigating ALL of the dangers. The overlying reason I choose to consider, assuming you are not able to monitor the market carefully, is a possible war action with Iran. It will most likely happen at night when the markets are closed and on a weekend. Just wait, we will know in a few months what is going to happen. Never be in a rush to buy into the market, it will there tomorrow.
Someone just pointed out that all you have to do is place a Trailing Stop and you would be protected. Obviously this person wasn't aware the dangers of markets gaping down, past the stop as in the Flash Crash 2 years ago, and NEVER executing the sell order. This left the stock owner watching his investment go down the drain until it hit the first trade which could be many, many points below his set stop loss. It would be just as useless and create much pain when it is sold at a loss and then watches the market pop up again and this is not an isolated fairy tale for those who witnessed it.
The issues here are were are in a down market looking for further lows and bringing down the blue chip leaders as well and a REAL possibility of a conflict as I discussed in the previously mentioned Black Swan article.
There are some people who also believe that the private Federal Reserve with the Treasury in tow has the ability to prolong the worst symptoms of the collapse indefinitely, or at least, until they have long since kicked the bucket and don’t have to worry about it anymore (the ‘pay-it forward to our grandkids’ crowd) .
I can say with 100% certainty that most of us will live to see the climax of the breakdown, and that this breakdown is about to enter a more precarious state before the end of this year.
You can only stretch a sun-boiled rubber band so far before it snaps completely, and America’s financial elasticity has long been melted away. A pummeling hailstorm of news items and international developments have made the first half of 2012 almost impossible to track and analyze.
The frequency at which negative information has surfaced is almost dizzying. However, a pattern and a recognizable motion are beginning to take shape, and, I believe, a loose timeline is beginning to form.”
In conclusion I would not jump into the Facebook IPO for the reason Buffett mentioned, there are better and safer long term choices for those who can't watch the market on a daily basis and the odds of a seriously weakening market coming to fruition - SOON.
Written by Gary