Keith Fitz-Gerald
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Facebook Stock is Worth $7.50 a Share at Best
Duh on you if you bought the Facebook IPO.
Double duh if you're thinking of buying Facebook stock now that it's fallen to $32 a share and lost $17.16 billion off its initial $104 billion valuation.
The company is only worth about $7.50 a share. And, no. That's not a typo. There is no missing zero or a placeholder.
That's reality. What is ludicrous is that Morgan Stanley and Facebook executives thought the company merited a $104 billion valuation at 100 times earnings.
As my good friend Barry Ritholtz pointed out recently, both Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) debuted at about 15 times earnings. Today they trade at 13.6 and 18.2 times earnings and 3.75 and 4.9 times sales respectively.
As I type, Facebook's market cap is $86.84 billion and its price to sales is ridiculously high at 21.01. I think that's way out of line.
So what should the numbers be?
Try this on for size. If we use Google's price to sales ratio of 4.9 (and I am being generous here for discussion purposes), that equals a total market cap of $20.24 billion or 76.68% lower than where it's trading today.
With 2.74 billion shares outstanding, that's equal to only $7.39-$7.50 per share.
No doubt I'll get the evil eye from the Facebook faithful and Morgan Stanley for saying this, but think about it.
Revenue is already slowing and the company does not and cannot possibly dominate the mobile markets that are becoming the preferred channel for millions of people.
Worse, startups are already cannibalizing Facebook's user base as concerns over privacy and who likes who mount.
Companies like General Motors (NYSE: GM) are deciding not to renew their advertising. This is going to hit Facebook to the tune of $10 million a year for the loss of GM alone.
More will undoubtedly head out the door for the same reason, since Facebook friends don't necessarily translate into revenue.
Corporate buyers are beginning to figure out that advertising on Facebook is simply not cost effective versus other media alternatives – gasp – including good old fashioned television and radio advertising, billboards and tradeshows.
Facebook Stock: At the Mercy of the Merely Curious
Many people think this isn't a big deal. They couldn't be more wrong.
If I Owned Yahoo (Nasdaq: YHOO) Stock, I'd Be Pissed
It's no wonder Yahoo! Inc. (Nasdaq: YHOO) investors are pissed. I would be too if I owned Yahoo – but I don't.
Why not?
Maybe it's the four CEOs in five years, the botched sale to Microsoft in 2008, or a Chief Executive Officer who can't be bothered to verify his own credentials in SEC filings.
Or maybe it's the dysfunctional board of directors and the erosion of massive amounts of shareholder value over the years.
Add it all up and you have an unmitigated disaster on your hands.
Activist shareholder Daniel Loeb, who owns 5.8% of the company through his hedge fund, Third Point, LLC, has every right to be angry and vocal about it.
The way I see things, Yahoo is following what I call the Christopher Columbus School of Management: it has no idea where it's going, has no idea where it's been and has no idea what to do when it arrives.
The Search for an Identity at Yahoo (Nasdaq:YHOO)
Yahoo was ostensibly a search engine in the beginning. The latest outgoing CEO, Scott Thompson, had been trying to rebuild the beleaguered Silicon Valley company into one more reflection of his own strengths in data personalization as opposed to the bloated advertising-driven business it has become.
Whether or not Thompson would have succeeded is now a moot point. Incoming interim CEO Ross Levinsohn has an advertising background. Talk about a conundrum.
Here's the thing…
Five with Fitz: What I See When I Look Over the Horizon
When you've been working the markets as long as I have, you learn that the biggest dangers are always found in a place just over the horizon.
It's why I spend my time hunting for stories, news items and opinions that in the old days were considered far "below the fold."
Invariably, what I am looking for is the stuff that everybody else has missed.
Because I believe that's where the real information is — especially when it comes to uncovering profitable opportunities others don't yet see or understand.
It's the story behind the story that interests me. To find it, you need to go beyond the headline news.
In that spirit, here's my take on five things that I'm thinking about right now.
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High Oil Prices: The Truth About Obama's Misguided Witch Hunt
It has been less than a month since President Obama declared war on those evil oil speculators.
Standing in the Rose Garden on April 17th, the president laid out a $52 billion initiative to increase federal supervision of oil markets in an effort to crack down on oil price spikes.
At the time, oil was trading at $117.41 a barrel and $5 a gallon gas seemed all but inevitable.
According to the p resident, evil speculators had been working behind the scenes to screw the rest of us while engorging themselves on riches beyond our wildest dreams.
I said it then and I'll say it again…the president is chasing a ghost he'll never catch. Spending $52 billion on additional oversight is a complete waste of money and a misguided witch hunt.
I mean, think about it. If speculators are the same ones responsible for high oil prices, ask yourself why they're the ones getting raked over the coals these days as oil prices fall.
The short version: It's because speculators don't control oil prices and never have.
The Real Culprits Behind High Oil Prices
Pricing inputs – for better or worse – are driven by geopolitics, supply constrictions, war, tyrants with spigots and buyers who will only purchase as long as the prices are low enough.
This is not complicated. Any time there are more buyers than sellers, prices go up. When there are more sellers than buyers, prices go down.
Whether or not what's happening now turns out to be short- term noise or a long- term trend remains to be seen.
As I noted in a widely read article on April 20th, legitimate speculation has a valuable and essential role in the markets. It's very different from the already illegal manipulation that the president seems to confuse with speculation.
Oil prices are driven by two groups of participants – hedgers and speculators.
The former are typically producers or suppliers with a vested interest in securing as high a price as possible for their output. They can also be manufacturers who depend on procuring as low a price as possible for their raw materials. Both parties are interested in delivery as a function of pricing.
Speculators don't care about delivery and, in fact, go to great lengths to avoid it.
They profit from price changes that would otherwise hold hedgers apart while also providing liquidity to other market participants.
Here's an example that may help bring this to life.
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Everything You Need to Know About Gold Prices
Gold's hot. Then it's not. Now what?
Where did the love for the shiny metal go?
Now the gold bugs are crying, and the "I told you so crowd" is warming up in the wings.
After a stunning rally to $1,895/oz., gold prices are down hard, falling below $1,600/oz. That's a 16.11% drop that has the gold bears drooling for more-but probably not for long.
Let's start with gold prices themselves. Right now they're down three months in a row and many gold investors fear there's no bottom in sight.
What they don't realize is that the fall in gold prices is as rare as proverbial hen's teeth. This is the first time we've seen gold prices tumble three months in a row since March of 2001.
In fact, since 1957 we've only seen gold prices fall three months in a row 65 times out of a total of 661 three-month periods, according to data compiled by Bloomberg and Standard and Poor's.
But here's the thing about gold prices…
Gold could fall all the way through May, turning what it already a rare occurrence into an ultra-rare occurrence.
Would that be a bad thing? In the bigger scheme of things, not really.
People forget that gold prices fell by more than half from 1975 to 1976, and were down 17 out of 24 months. At the same time, gold prices also recorded 10 three-month declines during the period.
That was, incidentally, right before gold rose 721.25% to $850.00/oz.– a peak gold hit on January 21, 1980.
The point is, bear tracks always precede bull market runs. So I am not especially concerned by this pullback in gold.
In fact, as you can see from an earlier forecast, we're right on target with my expectations for gold this year.
Take a look at what I shared with my readers on January 2, 2012:
What U.S. Consumer Spending Data Is Telling Us
The markets slid yesterday on news that U.S. consumer spending increased by 0.3% in March, while income rose 0.4% over the same time frame. This is the first time since December we've seen income rise faster than spending.
I can't say I am entirely surprised.
As prices for "must haves" like gasoline and food continue to rise, consumers are digging into their savings to cope. This is not small potatoes, given that the average family saved a mere $38 out of every $1,000 in take home pay last month, according to the U.S. Commerce Department.
I can't help but have huge concerns about Team Bernanke's plan; no amount of stimulus is going to overcome the struggle most families are having – which is to boost savings and shed debt.
Here's the thing… if consumers can't save, then they can't buy. And if they can't buy, they can't build up the nation's wealth, which is predicated on consumer spending.
All three sets of figures in isolation really don't tell you much. But when taken together – spending, income, and GDP – they suggest our economy is too weak to put millions of Americans back to work, much less in jobs for which they are appropriately qualified.
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What Magazine Covers Really Say About the Stock Market
Will Rogers once said that "good judgment comes from bad experience, and a lot of that comes from bad judgment."
If he only knew.
Then again, as one of America's famous humorists and social commentators, I suspect he "knew" all too well that history rarely works out the way people think.
Take the late 1990s, for instance.
As capital markets liberalized and the Internet Age began in earnest it was a time of great hope.
Companies that had very little other than a ".com" after their name suddenly became worth hundreds of millions of dollars. Boo.com, Pets.com, and Kozmo.com are a few that come to mind.
But were any of them worthy of all the hype?
I was one of the few who didn't think so. Many people considered me a Luddite because of it.
I wasn't trying to be difficult. I just reasoned that when everybody "knew something" that the end was near.
How did I know?
Well I didn't…exactly. But, I had a good idea thanks to something my grandmother, Mimi, used to call the "country club" test.
After being widowed at a young age Mimi was a seasoned, successful global investor in her own right. She reasoned that when an investment or a trend began making the rounds over drinks, it was time to move on.
And if she heard something around the poker table, she'd actually bet in the other direction.
One day, I asked what her secret was.
In no uncertain terms she told me to look carefully at the world around me and, in particular, at magazine covers.
According to Mimi, they were the next best thing to a crystal ball. Because whatever is all over the covers is what's on top of the mind on the cocktail circuit — not to mention fodder for the masses…who are usually wrong.
Frankly, I thought Mimi had consumed one too many martinis. She loved them. Then, as my own career progressed, I began putting two and two together.
It turns out it wasn't the gin talking. Mimi was right.
Magazine Covers and the Stock Market
I've never forgotten Mimi's advice and still study magazine covers intently to this day because they help me latch on to important market shifts and trends that others either miss or simply don't see coming.
I am not so much interested in the stories themselves as I am in reading into the implications of headline copy. Many times I find out that what's being said in the headline isn't as important as what's being left unsaid.
For example, do you remember this magazine cover touting the "death of equities" from Business Week's August 13, 1979 edition?
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Investment Advice: 5 Ways to Conquer Gambler's Ruin
The relationship between investing and profits seems simple enough. You buy low, sell high and your portfolio grows — or so goes the story.
In reality though, success comes down to something called "Gambler's Ruin."
Most investors have never heard the term but understanding its implications can mean the difference between heartache and success, especially now.
Gambler's Ruin is a mathematical principle that deals with the preservation of assets – or, more accurately, the probability that you'll lose them over time.
Here's how it works:
Imagine that Player One and Player Two each have a finite number of pennies, which they flip one at a time, calling "heads" or "tails." The player who calls the flip correctly gets to keep the penny.
Since a penny has only two sides, it would seem on the surface that each player has a 50% probability of winning – and that's indeed the case for each individual flip.
But, if the process is repeated indefinitely, the probability that one of the two players will eventually lose all his or her pennies is 100%.
In mathematical terms, the chance that Player One and Player Two (P1 and P2, respectively) will be rendered penniless is expressed as:
- P1 = n2 / (n1 + n2)
- P2 = n1 / (n1 + n2)
In plain English, what this says is that if you are one of the players, your chance of going bankrupt is equal to the ratio of pennies your opponent starts out with to the total number of pennies.
While there are wrinkles in the theory, the basic concept is that the player starting out with the smallest number of pennies has the greatest chance of going bankrupt.
In the stock market the player with the smallest number of pennies is you… and me…and any other individual investor, for that matter, who is up against the big boys.
Investment Advice: Playing to Win
If you've ever been to Las Vegas or Monte Carlo, chances are you understand this at some level, if for no other reason than that the longer you stay at the tables, the greater the probability that you will lose.
Investing is much the same.
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Oil Price Manipulation: What President Obama Doesn't Understand About Oil
If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.
I'm sure you've seen the news by now.
The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase f ederal supervision of oil markets.
What the p resident doesn't understand is that the oil markets already have this function built in.
Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher – only to flip the oil for a quick profit."
Evidently, the president hasn't passed Econ 101.
If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.
Speculation, as opposed to manipulation, is a vital part of the markets – they are not the same thing despite the fact that the p resident is interchanging the terms.
If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.
The Real Problem with Oil Prices
The real problem is that the United States consumes 20% of the world's crude but only produces 2%.
It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.
If you want the biggest piece of the pie from the deli, you have to pay a premium.
There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.
Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.
Take gasoline, for example.
Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.
They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.
This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.
Contrast what's going on in the oil markets with what's happening in natural gas.
Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.
Natural gas, by the way, is traded by many of the same traders who trade oil.
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