Successful investing requires two main components – making big money when we are right, and limiting drawdowns when we are wrong. Making big money inevitably involves being invested in top companies during their most profitable, bullish runs.
Our investing capital should naturally flow to the stocks that are going to reap the best performance, and gravitate away from stocks that are showing troubling signs. These can include deteriorating fundamentals such as slowing earnings and revenue growth, or more technical-based signs such as the stock breaking down below significant support levels, a series of lower stock price lows, and heavier trading volume on down days. These instances can serve as a warning signal that institutions are unloading shares and it’s best to sell rather than hold a stock that will continue to move down.
Case in point today: Meta Platforms . FB has been a great growth stock for many years. Yet plenty of warning signs over the past few weeks and months presented an opportunity for long investors to begin scaling out of FB stock and potentially avoid this selloff.
We can see higher selling volume on down days as notated by the red arrows toward the bottom of the image below. Also note that FB stock had been making a series of lower lows and moved below both the 50 and 200-day moving averages. What once acted as support then became resistance. In addition, the stock experienced the dreaded death cross (highlighted by the yellow circle) shortly before FB reported earnings, wherein the 50-day moving average crossed below the 200-day moving average. This was another warning signal for investors.
Image Source: TradingView, Zacks Investment Research
Of course, today’s plunge in Meta Platforms is owed to weaker than expected quarterly results that were extremely difficult to see coming for the average investor. This is why technical analysis can really help guide investors and give them a sense as to what institutions are doing with a given stock. And clearly, institutions began unloading FB shares far in advance of the recent earnings announcement.
Rather than remain invested in falling stocks, our aim is to have the wind at our backs. We want to take a long-term approach to stocks. This translates into letting our winners run over the course of many years. Perhaps a good move for early FB investors with substantial gains in the stock would’ve been to take partial profits as the stock broke down in the weeks and months prior to the earnings announcement. For more recent investors the situation changes.
When it comes to losses, we want to employ more short-term thinking. The only way to avoid a large drawdown is to sell our losing positions before they develop into the types of losses that are detrimental to portfolio performance. For recent FB investors, selling at a loss before the earnings announcement was the most prudent course of action. Let your winners run, and cut your losers early.
Cutting losers goes against natural human emotions. Most retail investors don’t have a plan in place and once a stock drops from their entry point, they continue to hold it in the hopes that they will get back to even. If the stock continues to drop, they justify holding the stock by thinking that it’s now a bargain. If you find yourself as an investor thinking along these lines, it’s time to change that thought process. This one small tweak in your approach will save you a lot of money over the long-term.
Even the best investors go through drawdowns, but they are able to limit their losses. They don’t mind taking small losses as they know it is part of the process. They realize that they can always get back into a good stock when the market is more favorable. Taking small losses allows them to preserve their investment capital and wait for new and better opportunities to present themselves.
So where does FB go from here? Revenue growth rates have naturally come down over time:
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for 2022 EPS stands at $14.00, representing growth of just 1.67% relative to 2021. FB reported monthly active users of 2.9 billion last quarter, just a 4% increase from the same quarter in 2020. There may be some tough times ahead for FB in the short-term.
However, while Q4 revenues came in light at $33.7 billion, they still grew 20% year-over-year which most companies would be thrilled with. The stock is now trading at just 6x sales, which matches the March 2020 P/S low and the lowest ratio in the company’s history. For the year, FB earnings grew 36% in 2021. At the time of this writing, FB’s TTM P/E sits at 17x which is down from 30x last year. It remains to be seen if the slower growth that is being priced in will continue or if FB will be able to innovate and beat expectations as it has in the past.
Much has been written and said in recent years about FB’s slowing growth – this is really nothing new for investors who have been paying attention. But over the course of the past decade, the naysayers have been proven wrong again and again. FB stock has delivered outstanding gains over the years as the company continues to find new ways to invent and modernize.
And while the stock price is likely to fluctuate wildly in the short-term, today’s plunge may represent a good entry for longer-term investors if they believe the company will outpace the lower growth that is now priced in. I wouldn’t count FB out just yet.
Image: Bigstock
Meta Platforms: Plenty Of Warning Signs Before Today's Plunge
Successful investing requires two main components – making big money when we are right, and limiting drawdowns when we are wrong. Making big money inevitably involves being invested in top companies during their most profitable, bullish runs.
Our investing capital should naturally flow to the stocks that are going to reap the best performance, and gravitate away from stocks that are showing troubling signs. These can include deteriorating fundamentals such as slowing earnings and revenue growth, or more technical-based signs such as the stock breaking down below significant support levels, a series of lower stock price lows, and heavier trading volume on down days. These instances can serve as a warning signal that institutions are unloading shares and it’s best to sell rather than hold a stock that will continue to move down.
Case in point today: Meta Platforms . FB has been a great growth stock for many years. Yet plenty of warning signs over the past few weeks and months presented an opportunity for long investors to begin scaling out of FB stock and potentially avoid this selloff.
We can see higher selling volume on down days as notated by the red arrows toward the bottom of the image below. Also note that FB stock had been making a series of lower lows and moved below both the 50 and 200-day moving averages. What once acted as support then became resistance. In addition, the stock experienced the dreaded death cross (highlighted by the yellow circle) shortly before FB reported earnings, wherein the 50-day moving average crossed below the 200-day moving average. This was another warning signal for investors.
Of course, today’s plunge in Meta Platforms is owed to weaker than expected quarterly results that were extremely difficult to see coming for the average investor. This is why technical analysis can really help guide investors and give them a sense as to what institutions are doing with a given stock. And clearly, institutions began unloading FB shares far in advance of the recent earnings announcement.
Rather than remain invested in falling stocks, our aim is to have the wind at our backs. We want to take a long-term approach to stocks. This translates into letting our winners run over the course of many years. Perhaps a good move for early FB investors with substantial gains in the stock would’ve been to take partial profits as the stock broke down in the weeks and months prior to the earnings announcement. For more recent investors the situation changes.
When it comes to losses, we want to employ more short-term thinking. The only way to avoid a large drawdown is to sell our losing positions before they develop into the types of losses that are detrimental to portfolio performance. For recent FB investors, selling at a loss before the earnings announcement was the most prudent course of action. Let your winners run, and cut your losers early.
Cutting losers goes against natural human emotions. Most retail investors don’t have a plan in place and once a stock drops from their entry point, they continue to hold it in the hopes that they will get back to even. If the stock continues to drop, they justify holding the stock by thinking that it’s now a bargain. If you find yourself as an investor thinking along these lines, it’s time to change that thought process. This one small tweak in your approach will save you a lot of money over the long-term.
Even the best investors go through drawdowns, but they are able to limit their losses. They don’t mind taking small losses as they know it is part of the process. They realize that they can always get back into a good stock when the market is more favorable. Taking small losses allows them to preserve their investment capital and wait for new and better opportunities to present themselves.
So where does FB go from here? Revenue growth rates have naturally come down over time:
The Zacks Consensus Estimate for 2022 EPS stands at $14.00, representing growth of just 1.67% relative to 2021. FB reported monthly active users of 2.9 billion last quarter, just a 4% increase from the same quarter in 2020. There may be some tough times ahead for FB in the short-term.
However, while Q4 revenues came in light at $33.7 billion, they still grew 20% year-over-year which most companies would be thrilled with. The stock is now trading at just 6x sales, which matches the March 2020 P/S low and the lowest ratio in the company’s history. For the year, FB earnings grew 36% in 2021. At the time of this writing, FB’s TTM P/E sits at 17x which is down from 30x last year. It remains to be seen if the slower growth that is being priced in will continue or if FB will be able to innovate and beat expectations as it has in the past.
Much has been written and said in recent years about FB’s slowing growth – this is really nothing new for investors who have been paying attention. But over the course of the past decade, the naysayers have been proven wrong again and again. FB stock has delivered outstanding gains over the years as the company continues to find new ways to invent and modernize.
And while the stock price is likely to fluctuate wildly in the short-term, today’s plunge may represent a good entry for longer-term investors if they believe the company will outpace the lower growth that is now priced in. I wouldn’t count FB out just yet.