I'm a huge fan of stocks that go up.
I'm an even bigger fan of companies like Facebook Inc. (Nasdaq: FB) whose stock goes up, and keeps going up, for all the right reasons.
That is, until it drops like a stone.
A lot of investors admittedly missed FB on the way up. But a lot of investors who owned it rode it up and smartly got stopped out because they used trailing stops.
If you're either one of those investors or neither, you probably don't want to miss FB's next move up, but don't want to see the stock tumble more.
Volatility like we've been seeing can be scary. But with the method I'm about to share with you has been a staple in my Zenith Trading Circle research service.
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Now, here's how to play the world's most popular social media site in any market condition...
"KISS" with Facebook
There are so many ways to play the market and to play a stock that it can be dizzying, to say the least.
The good thing is that one way of playing always works. The "Keep It Simple Stupid" (or KISS) method of trading and investing works every time. And the beauty of it is that it really is simple.
Facebook's the perfect example.
It would be easy – but time-consuming – to get into all the reasons and metrics that drove FB's stock higher, analyze what each moving part did, and how the stock reacted.
But that's not simple.
What is simple, because we know it's true and because it's after the fact, is that FB made money figuring out how to attract advertisers and how to transition its success attracting advertisers onto mobile devices.
And, with over two billion users, FB has a huge audience coveted by advertisers.
That's not rocket science.
But FB going from $25 in 2012 to $218.62 this year is a rocket ride. That's a massive 774.48% gain.
Then the rocket began to tumble out of its orbit.
On July 26, 2018, FB's stock fell 19%, closing at $179.26 after the company missed expectations on Q2 revenue and showed slowing user growth. To make matters worse, management warned about future growth during FB's earnings call.
The company lost $120 billion in market capitalization that day, the worst one-day drop in the history of the stock market.
FB's market value the day before, on July 25, was $630 billion. At the close of trading on July 26, it was worth $510 billion. Ouch!
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And that wasn't the end of FB's slide.
The stock got to $150, where it had considerable support. It hung there once, twice, and then broke down. The stock bottomed out at $139.03. Over this past week, the stock popped back above $150.
Here's what all that action means to the pros, and how you should view the stock right here.
The FAANG Gang
First, in the larger context of "the market," which has been volatile to say the least, no one knows if the downdraft is over or not. Some benchmarks have fallen 10% from their highs – the classic definition of a "correction."
Analysts are split, but the weight of investor nervousness has a slight majority leaning towards more near-term selling.
But, we could just as easily go higher.
The problem investors face when looking at FB is if it will rise with the market if the worst is over and if it will head back to new highs. Or will FB, which has been the weakest of the former tech-darling FAANG gang, crumble if the market tumbles?
This is how I'd play FB right now:
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I'd buy some right here, around $150. That would be my starting point, because I'd only allocate one-quarter of what I want to spend on an FB position.
If the stock goes up, great. If the market steadies, we get past the mid-term election volatility unscathed, and bullish signals start sprouting (one solid signal would be if the FAANG stocks were all moving higher), I'd buy more stock at $160.
From there, if I think we're clear to take off again, I'd buy more as the stock recovers.
I don't mind buying more stock at higher prices in a rising market. That's fine with me.
What I'd do, because I'm paying up and increasing my average cost, is use trailing stops.
If FB slips back after I take an initial position, I'd look to average down. That means I'd buy more stock on the way down.
For me, the $139 level the stock got down to will be telling. I'll look to that level to see if the stock gets back there and how it reacts. If it holds there and the market's not doing much, but is acting like it's going to go higher, I'd buy another 25% of my allocation around $140.
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The problem, which will be scary for some people, is if the market has further down to go. If the market retests its lows and breaks them, we could go a lot lower.
How much lower is anybody's guess.
That would probably cause FB to tumble quickly.
Why? Because a lot of investors who are buying at $150 and will buy at $139 to $140 will get spooked and sell out.
Not me. I would have allocated half my position capital, and I'd be waiting for what I think is FB's next support level.
That's $120. I'd buy more stock there.
Then I'd see where we're at in terms of the market and FB.
That will be a scary place. I'm not guessing now what it will look like if we get there.
What I will do is be writing, right here, about what's happening, what things look like, and where we could go next.
I'd be looking to buy my last piece of FB on a further dump.
Once any panic that happens is over, and we look good, I'd buy my last piece as the market and FB tick up.
The real deal with FB is it's a must-own stock. The company is gigantic and is going to be one of the mega-companies of the future – even more so than it is today.
FB's got so many ways to monetize its more than 2 billion users, it's frightening.
Frightening to not be in the stock, that is.
That's how I'd play FB now, because in the future I'd be glad I did.
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The post How to Invest in Facebook - the Smart Way appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.