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.


 Google IPO Base


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.


Best Returns,


Scott O'Neil

President, MarketSmith Incorporated

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