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Will Facebook Become Hedgeable?


Options may come online for Facebook next week.

My co-author Jay Pestrichelli was on Fox Business this morning talking about how the market has treated Facebook (FB) since its IPO. Needless to say, it wasn't a feel-good story. I agree with his assessment that momentum and early news on the company does not support a buying thesis in the short-term.

I am glad that we told all of our clients to avoid it at IPO. Every financial advisor in the country got calls from clients about getting shares of this IPO. But this call was easy for us.

But it made me wonder what would have to happen to Facebook to make it a buy for my firm, which operates on a buy and hedge philosophy.

First, options would need to come online for Facebook. CNBC has reported that this will happen in the next week. That is a good sign. With a stock at this market cap, the options market will likely be very liquid and have very good open interest.

Investors should also recognize that having liquid options should help to stabilize the stock price for Facebook. More institutional ownership will come in and we'd expect the daily fluctuation in Facebook to get a little more muted.

Second, the price is going to need to come in line with value. Personally, I think Facebook has to come down around the $20 to $21/share price range to start to look interesting.

Let's remember that this firm's PE ratio is still over 75x at the $34/share price. If the price comes down to $20, the PE would still be 44x.
Facebook is a growth story and deserves a premium PE. But the growth is slowing and the demographics of the Facebook user do not impress me.

I think this company needs stellar earnings releases in the next two quarters. Otherwise, I am confident that the $20 price level will be tested. Even if Facebook doubled its earnings over the next 24 months, at the $20 price the PE would finally come back to earth around 22x.

If you really want to own it around the levels it is trading at today, whatever you do, wait for the options market and make sure you are hedged. This stock is in for an even bumpier ride!

Editor's Note: For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies.
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No positions in stocks mentioned.
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