When a stock quits going down on negative news, the stock has probably hit the lows. Facebook (FB) finds itself in that position with an ongoing negative news flow and a stock that has rallied off the November 19 low and held in the face of a another market selloff. My investment thesis was negative on the stock when $150 didn’t hold, but the thesis is shifting back bullish here below $140.
Image Source: DCMS twitter feed
Negative News Cycle
Facebook hit a low of $131 on November 19 and now trades at $137 while the market is back at recent lows. The key here is that the negative news flow hasn’t improved.
Ironically, November 19 was the date that the WSJ reported that CEO Mark Zuckerberg was treating the company as if it was at war. Since that date, Facebook has faced these negative headlines without the stock falling:
One can clearly see the news flow hasn’t improved in the last couple of weeks. Regulators and investors questioning the actions of the top two executives combined with more data privacy concerns and new European taxes isn’t typically a recipe for stock gains.
While regulators move to punish the company, the user base hit peak negativity all the way back in March. According to Google Trends, the search phrase “delete facebook” hit a 5-year high nearly nine months ago. The hatred for Facebook is already back to normal levels.
Source: Google Trends
This anecdotal evidence isn’t a sign that the coast is clear for the stock. The trading action, though, is suggestive of a market sentiment shift.
Booming Buyback
Maybe shareholders like that Zuckerburg is aggressively re-engaged at the company. The share buyback boost announced after the close suggests the CEO is working for shareholders to improve the stock price.
Facebook announced the addition of $9.0 billion to the share buyback authorization. The social networking company had previously authorized the repurchases of up to $15.0 billion worth of buybacks bringing the total authorized since 2017 to $24.0 billion. Facebook has spent $10.3 billion on share buybacks over the last year.
The company ended the last quarter with a cash balance of $41.2 billion. With positive free cash flow of about $4.1 billion in the quarter, Facebook can aggressively repurchase shares without even bringing down the cash balance.
At a market cap of $400 billion, the buyback isn’t going to lead to a huge share reduction, but any amount helps the stock find a bottom.
Rock Bottom Estimates
My previous research at the end of October was hesitant to jump into the Facebook story until EPS estimates hit rock bottom. Over the course of the last month, it appears that estimates are now headed higher.
FB EPS Estimates for Current Fiscal Year data by YCharts
My worse-case scenario had ’19 EPS estimates dipping below $7.00 with a realistic target for the bottom in the stock to occur when analysts got down to $7.50 per share. A more bullish fundamental story can be made without the risk of significant EPS cuts while the stock is close to yearly lows.
Facebook hasn’t traded a this low a forward P/E in a long time.
FB PE Ratio (Forward 1y) data by YCharts
Takeaway
The key investor takeaway is that Facebook appears to have hit rock bottom along with the EPS trend. Negative news is no longer hitting the stock despite a very weak stock market. Now is the time to start building a position on weakness down to the recent lows around $131.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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