Are you still crying about the Facebook (ticker = FB) initial public offering (IPO)? Did you miss it, or even worse, did you get in on it? Keep in mind the IPO did exactly what it was supposed to do: reward the early investors and give the company working capital for future growth. Judging from the fact that it climbed less than 20% from its initial offering price of $38, they priced it nearly to perfection. The question of whether Facebook properly and fully disclosed information is a valid one, but you can almost assume that goes on to some degree with every high profile IPO.
Gone are the days when you will see a hot IPO with huge gains on its opening day, and you should be thankful for that. Investing should be fun, and you should avoid making it emotional. There are too many computers programmed to tear the hearts out of emotional investors, and the current market environment can turn on a dime as the big money rolls in and out. Big players enjoy seeing tiny trades cross the tape, suggesting individuals are scraping together whatever they can to own shares in a hot company at any price. If you chased after FB shortly after it started trading on Nasdaq, you have to ask yourself, “Why did I buy this?” Did you really believe you were going to sell the stock at a huge gain if it went on a tear on opening day? History suggests otherwise, as most investors hold on long after a hot stock has reached its peak.
Is it time to consider Facebook for your portfolio now that the initial excitement has died down? The stock was almost left for dead as recently as last week. Since then, it has enjoyed a 20% rise to close at 31.41 as of this writing. I suspect this volatile trading will continue as investors wrestle with how to value the stock. Go back to that first question before taking action: “Why am I buying this?” Your reasons may include being an avid Facebook user or because you see huge growth potential over many years. Either could form a reasonable basis for your investment decision. You should consider aspects such as how much money the company is earning now and how much growth it expects over the next one, three, and five years. That information is available to any individual willing to do the research. Stock analysts often use the Price-to-Earnings (P/E) ratio, which divides the current stock price by the current earnings per share, when making recommendations. FB’s P/E ratio of 78.33 looks lofty when compared with other tech giants like Apple (AAPL) at 14.27 and Google (GOOG) at 17.30, but Apple and Google are both seasoned companies who will find it more difficult to post outsized earnings growth like in years past. Starting at such a low base, Facebook will have an easier time posting strong annual earnings growth, supporting a higher P/E ratio. Its high profile will likely also support a higher level of investor interest, providing more support for its stock price.
Disclosure: I don’t own any of the stocks mentioned above, but I would consider all as part of a long-term investment portfolio.