Tuesday, May 22, 2012

Facebook: A Common Sense Approach

Why do you want own Facebook’s (FB) stock?  Do you even know why?  Perhaps you want to own the stock because you think you would be missing out on something if yid did not.  Perhaps you feel it is a great investment because you log on to your Facebook account several times a day.  Either case does not resemble a strong investment thesis.

I admittedly only buy stocks in companies that I use and that have a business model that makes sense to me……the investor.  I missed out on the wonderful IPO performance of Google (GOOG) because I did not understand why advertisers pay for ad space.  I use Google and Facebook several times a day, but in the last seven years I have never clicked on an ad, and I probably never will.  I understand people must click on ads because companies continue to buy ad space.  I do not, so I have trouble relating to a business model that depends on behavior that I do not exhibit.

If you are considering purchasing shares of Facebook, then you need clearly understand why you are doing so.  I just purchased shares (going against my own philosophy) because the valuation is very compelling to me.  Facebook shares are now trading at roughly 15 times earnings and that is a very reasonable valuation for a growth company.  I did not buy Facebook because I log on to my account every day.  Heck Facebook does not charge for their service.  I bought the stock because the financials make sense to me at this point in time.

I believe a better approach, with the use of common sense, would be to look at companies that offer products that people need to buy to be able to access Facebook.  Has anyone heard of the iphone?  The iphone is a hard asset that people are buying like crazy so they can use the free Facebook application.  An investment in hardware is one that I can relate to versus relying on companies to buy ad revenue, while hoping for clicks that I do not make.  Sure the Google IPO was successful, but over the last five years Apple’s (AAPL) stock price is up 394% while Google’s stock is up 29%.  Or how about a company that supplies technology to make many iphone features possible such as Qualcomm (QCOM).  Qualcomm shares are up nearly 34% over the last five years.

I’m not claiming Google or Facebook’s stocks are not a good investment at this point in time, but I am claiming that investors should understand why they want to own them.  I believe we have not been in the most robust economic environment, and yet Google and Facebook are still pulling in a tremendous amount of advertising dollars.  I believe this trend will get stronger as the global economy gets stronger in the future.  That is why I bought Facebook shares, and why you should be able to clearly state your position before buying shares for yourself.

Thank you and good luck everyone!

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”