Is Facebook a Good Portfolio Play?

With shares of Facebook (NASDAQ:FB) trading around $58, is FB an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Facebook is engaged in building social products in order to create utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them with the people they care about. Developers can use the Facebook platform to build applications and websites that integrate with Facebook to reach its global network of users, building personalized and social products. Advertisers can engage with more than 900 million monthly active users on Facebook — or subsets of its users — based on information they have chosen to share.

Facebook posts that ask users to like, share, comment, or ignore are going to become a no-no in the near future due to changes in the computer formula responsible for the News Feed. Facebook is tinkering with what users will see in their News Feed: The goal is to keep the spam out of users’ feeds, it claims. Facebook announced the change in a post on its newsroom blog Thursday. The post says that the reason is to prevent repetitive material, spam and “like-baiting,” which the company says causes users to hide content because they find it less relevant.

T = Technicals on the Stock Chart Are Mixed

Facebook stock has been exploding to the upside in recent years. However, the stock is currently trading sideways and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Facebook is trading between its rising key averages, which signals neutral price action in the near-term.

FB

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Facebook options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Facebook Options

64.64%

71%

69%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of Monday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Facebook’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Facebook look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

1,322.38%

108.33%

58.33%

0%

Revenue Growth (Y-O-Y)

5.65%

59.75%

53.13%

37.81%

Earnings Reaction

14.10%

2.44%

29.61%

5.61%

Facebook has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Facebook’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Facebook stock done relative to its peers – Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and LinkedIn (NASDAQ:LNKD) — and sector?

Facebook

Microsoft

Google

LinkedIn

Sector

Year-to-Date Return

3.53%

9.41%

-3.07%

-23.7%

-2.45%

Facebook has been a relative performance leader, year-to-date.

Conclusion

Facebook looks to provide a valuable social networking experience to its users, developers, and advertisers. The company is tinkering with what users will see in their News Feed. The stock has been exploding to the upside but is currently trading sideways. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Facebook has been a relative year-to-date performance leader. Look for Facebook to continue to OUTPERFORM.

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