Editor's Note: This story was sent out to Keith's Total Wealth subscribers on Friday, July 27. To learn how you can receive all of Keith's Total Wealth research as soon as it's released, click here...
Facebook Inc.'s (Nasdaq: FB) stock has dropped more than 20.2% since Monday, with its plunge on Thursday marking the single-worst one-day drop for any stock in recorded U.S. market history. And, as I write, that’s at least a staggering $128+ billion buzzcut for shareholders and $16 billion for CEO Mark Zuckerberg personally.
Wall Street, of course, is falling all over itself, and I’d be laughing my asteroids off if the situation weren’t so predictable. The situation reminds me very much of Enron.
If you’re new to the financial markets or you don’t recall, here’s a quick primer.
Nearly 20 years ago, the company (Enron) was a Wall Street darling because of its ability to seemingly create profits out of thin air based on staggering energy trading profits. Executives were widely praised for their visionary leadership, ambition, and innovation. Fortune, in fact, named Enron “America’s Most Innovative Company” six years in a row from 1996 to 2001.
At the turn of the century, the company was processing nearly $350 billion in trades, and its stock had hit a peak of $90.75 a share per share on Aug. 23, 2000. Shares were worth $0.26 – no that’s not a typo; twenty-six cents each – when the company declared bankruptcy on Dec. 2, 2001.
Here’s what really stinks and why I’ve a monster case of déjà vu…
More than half of the 15 Wall Street analysts following Enron rated it a "buy" even after the company announced it was restating earnings years in arrears and after the company's stock had fallen from $84.87 to $4.14, according to CNN at the time.
Adding insult to injury, the stock dropped further from those levels to close at $0.61 per share on Wednesday, Nov. 28, 2001, and four analysts still rated the company a "buy," according to First Call.
The company was a smoke-and-mirrors operation fueled largely by FOMO - Fear Of Missing Out - and individual investors who couldn't be bothered to look beyond their own greed. Which ought to sound familiar today.
That's why I could only shake my head when I came across a headline the day after Facebook's drop on CNBC trumpeting "what every major Wall Street analyst had to say about Facebook's plummeting stock."
I warn you though... you better grab a stiff drink or Alka-Seltzer... or both. It's not pretty.
According to CNBC, here's how "every major Wall Street analyst" saw things heading into Facebook's announcement...
... J.P. Morgan - Overweight (a fancy way of saying "buy")
... Barclays - Overweight
... UBS - Downgrade to neutral from buy
... Bank of America - Buy
... Morgan Stanley - Overweight
... Goldman Sachs - Buy
... Deutsche Bank - Buy
... Nomura Instinet - Downgrade to neutral from buy
... Evercore ISI - Outperform (another $5 Wall Street term for "buy")
... Raymond James - Downgrade to outperform from strong buy
That's 10 "major" analysts who were bullish on Facebook ahead of earnings and 10 analysts who still cannot bring themselves to say "sell." Somehow, "here we go again" seems to sum things up.
At least UBS and Nomura had the guts to downgrade the stock, but after a 20% drop, "thanks a lot of nothing" is probably appropriate.
You, on the other hand, have enjoyed a very different experience.
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I am not beholden to Wall Street's conflicts, which means I can give you the best, most accurate analysis I can produce. I'm not hiding behind fancy ratings nor sequestered in an ivory tower.
I put "it" out there in public 100% of the time, and that's what makes Total Wealth such a great place to be and why, I suppose, we've got several million readers in the Total Wealth family as part of our larger publishing group, Money Map Press.
Last March, I said on FOX Business Network that the Cambridge Analytica data breach was Facebook's "Equifax Moment." Host Stuart Varney had me repeat that several times because it ran so contrary to Wall Street's darling mentality.
At the same time, I advised paid subscribers in our sister service, the Money Map Report, to sell shares in Facebook and plow the profits into Alphabet Inc. (Nasdaq: GOOGL) and Amazon.com Inc. (Nasdaq: AMZN).
Anybody following along as directed had the opportunity to capture at least 67% on the former and is in the running for a whole lot more money given how the latter two companies continue to climb - and, at a fraction of the risk, I might add. Anybody trading more accelerated options plays is well ahead of the game.
In April, I mentioned that CEO Mark Zuckerberg had a "calculated naiveté" when it came to the way the company treated user data. I also voiced concerns about the opinion that he was the right guy for the job, the very same concerns shareholders are raising this week for the very same reasons.
After another privacy issue in June, wherein 14 million users' private posts were actually made public on the website, I told viewers, yet again, that the company's rise is a "false rally." That it will catch millions of investors by surprise when the time came to show earnings and prove themselves.
This Monday, as that moment drew near, I said explicitly to "avoid" the company during an appearance on "Varney & Co." and again on Wednesday - just hours prior to earnings – when I called Facebook a "bug in search of a windshield" on "Cavuto: Coast to Coast."
You know what happened next.
Before we go any further, let's be clear.
I am NOT telling you this to brag. I make plenty of mistakes, but the difference between what I do and what Wall Street's analysts tells you is very clear - I own up to them.
My research and your subscription depend on it.
My entire team and I have strict policies in place that explicitly prohibit us from trading against our subscribers - meaning you. Wall Street does that all the time, and they go to great lengths to keep that a nasty little secret.
I have no investment banking relationships to cloud my judgment. Wall Street firms make hundreds of millions - even billions of dollars - flogging stocks they've acquired for pennies as part of dubious public offerings, warrants, or special situation investments you couldn't access if you tried.
I receive no compensation whatsoever from the companies I recommend and never will. Wall Street makes billions recommending companies in exchange for favorable "ratings" that are supposedly independent. That guarantees that the firms engaged in this nefarious practice have still more access to the next public offerings and special allotments of shares for a fraction of what you'll pay for them.
Net net, Total Wealth is a great place to be because you make it that way - free of conflict and free to play the "A-Game" for maximum profits every single day with every single recommendation.
Speaking of which, let's continue.
Here's What I See Next for Facebook
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No. 1. The company issued nightmarish guidance. CFO David Wehner said specifically that total revenue growth rates will continue to decelerate by high single-digit percentages in Q3 and Q4. At the same time, he said that expenses will grow by 50% to 60% year over year.
In plain English, that means the money Facebook brings in will drop, and the costs associated with operations will go up. Profits cannot help but get pinched.
Share prices always follow earnings over time, which means that you don't want to own any company where they're headed in the wrong direction.
No. 2. Major investors are now calling for Zuckerberg's ouster. Trillium Asset Management fired the first salvo Wednesday, but I expect other investors will follow. Interestingly, they're voicing many of the same concerns I did nearly six months ago, including specific doubts about Zuckerberg's management savvy.
In plain English, that means there's likely to be a huge shift internally when it comes to control. Zuckerberg still controls 60%, and backchannel comms suggest that doesn't go over well with a lot of people - including employees - who apparently think he's nothing more than a naïve rich kid with dictatorial tendencies.
My guess is we'll see a huge senior-level management shakeup because people with truly credible careers will want to distance themselves before they get Zucker-punched, especially if there's legal action.
Speaking of which...
No. 3. Facebook insiders, meaning senior executives, sold 13.6 million shares in Q2 while the company came to terms with fake news scandals and data leakage. That's TRIPLE the amount they sold in Q4 2017 and up 63.86% from the 8.3 million shares sold in Q1. That may or may not be in the headlines by the time you read this... but it will be.
In plain English, executives are cashing out at a substantially faster rate than before. The sales are reportedly in compliance with SEC Rule 10b5-1, which governs pre-approved selling, but I have a hard time believing this is a coincidence.
Insider sales ahead of bad news is never a good sign, but ahead of downbeat guidance, it's a nightmare for investors. Remember... the big cheeses were already long gone when Facebook's results cratered the dreams of millions of individual investors, just like you, in an instant.
Do you really trust an executive team that let this happen?
I don't.
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No. 4. EU privacy regs are going to cause further drops in engagement and user count. That means revenues slip and distrust mounts. I still haven't seen anything materially different in how the company handles privacy, hateful posting, and other contentious issues like false news, terrorism, and the like.
In plain English, that means there are still lawyers warming up in the proverbial bullpen for their shot at the Major Leagues. In fact, I'm betting there will be a number of class-action lawsuits by this time next year, both here and abroad.
No. 5. The company just shifted from "investment grade" to little more than a speculative potshot. Nearly 34 million shares traded hands Wednesday, which is nearly double a regular trading session over the past month, according to Bloomberg data.
In plain English, that means you're going to hear a rally cry that now's a good time to buy from the very same legions of Wall Street analysts who missed this in the first place. They're going to do everything they can to whip up the FOMO in the days ahead.
In fact, the publicity campaign has already begun. RBC Capital Markets analyst Mark Mahaney and Jeffries senior technology analyst Brent Thill, for example, both took to the airwaves on CNBC Wednesday, saying (and I'm paraphrasing here), "Don't lose faith in Facebook now because the company's valuation remains solid."
Other variations of the message will follow, but don't be fooled.
The bottom line is very simple.
It'll be tempting to leap back in - buy the dips and all that - but I want you to remember two things when it comes to Facebook:
- Wall Street wants you to buy Facebook's stock because doing so makes them money and shifts the risk of ownership to you. Besides, just who do you think is selling the shares you're going to buy??!! Hint, it's not Santa Claus.
- Facebook's stock ceased being an investment months ago. From now on, Facebook stock is going to be the domain of well-capitalized traders whose sole objective is to separate you from your money. Personally, I'd rather see you go to Las Vegas and have some fun if you fancy those odds.
Facebook just became the Enron of our day, and Wall Street deserves full disclosure for having missed once, now twice.
Don't give 'em a third shot at your money!
There are far better, far more profitable alternatives out there, and it's my job to help you find 'em.
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The post Facebook Reminds Me of Enron appeared first on Total Wealth.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.