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The Facebook IPO (ticker: FB) was interesting to watch. Remember in my father’s book, How To Make Money in Stocks, he writes, "Obvious seldom works in the market" and "The market moves to disappoint the masses.” So I was curious to see whether the amount of buzz around this offering would lead to the same type of IPO-day pop we’ve seen with other notable IPOs, like Google (GOOG) or LinkedIn (LNKD).
Everyone had an opinion on Facebook stock, and most were touting it as a great growth opportunity. In fact, my Father and I were approached by a friend, acting as a broker, to buy a large quantity of shares from an FB Senior Officer. At the time, I thought it was strange to sell so many shares before the IPO. It’s obvious now, after the fact, that the demand for Facebook shares had already been spent in the private market. Insiders cashed out, and new institutional investors bought in well ahead of the IPO, making it harder for a typical IPO-day pop to occur.
We have a rule not to participate in IPOs (or private equity deals) until they have been trading for at least a few months after an IPO. The risk level for the first few weeks after an IPO is unacceptably high, and we would rather see how Wall Street responds to the stock offering before we invest. Usually that means waiting six months for a recognizable chart pattern to emerge. Two IPOs we participated in early on were Google (GOOG) and Microsoft (MSFT). We were buyers of GOOG on 9/17/2004 and buyers of MSFT on 10/17/1986. On GOOG, we were buying out of an IPO base, while MSFT offered a cup pivot point. Both of these stocks had huge earnings prior to their listings.
I was quite skeptical about the barrage of hype and anticipation surrounding FB stock, since sales and earnings were decelerating. Regardless of the hype, we never buy based on the story alone. The reason we rely so heavily on a price and volume chart is so we can gauge supply and demand. Aside from decelerating earnings and sales growth, the story sounded pretty nice. But the chart couldn’t be more obvious. The IPO flopped because of too much supply of Facebook stock, and very little new demand. Insiders and early investors were desperately and greedily selling large quantities, and the retail market just wasn’t buying the hype. This doesn't preclude an opportunity to invest in FB down the road. But I’ll be watching to see if it can form a proper base before I do.
President, MarketSmith Incorporated
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Thanks for sharing your thoughts! I appreciate the analysis.
Hey Scott, great review, i was just looking over historical examples on Marketsmith (www.marketsmith.com) of AMZN (ipo) and DELL (ipo)... it's so early and speculative its almost silly to compare, but nonetheless interesting references... ACN (also an interesting one)
When referring to Skyscrapers, is it only on a weekly chart?
If a stock has a pattern of 3 days down and 1 day up over a period of time and then starts to change with 1 day down and 1 day up, would you view that as positive?
@miamorekarina: Yeah, we usually refer to skyscrapers on weekly charts. Here is a great article about what we are looking for: education.investors.com/.../use-up-down-volume-ratio-accumulation-distribution-gauges.htm
I'm not sure if I follow you on the daily patterns...but I don't look at patterns on a day-by-day basis. I spend most of my time on the weekly chart. Hope that helps.
Thanks, On the daily I was referring to the character change of FB with the down days an up days. Maybe I should have used character change instead, sorry for the confusion.
Scott: Thank you, as always, for sharing your insight and thoughts. As of the time of this writin (6/20), FB appears to be trying to form the right side of an initial base. I'm going to guess that based on the lack of solid earnings (as you saw with GOOG & MSFT at this "age"), you would avoid FB even if this cup forms symmetrically and constructively? Thanks again!! Brad
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