What's Facebook worth?... 'Boring' Wal-Mart hits another new high... New lows for Spain... And Treasurys... Eifrig's favorite ways to play low rates... A lesson on patience... 'The best $49 you'll ever spend'...
The rout in Facebook stock continues... Shares debuted at $38 a share on May 18. They hit a high of $45 that day (the smart money was selling on the way up), then retrenched to $38.23 at close. It was a disappointing opening for one of the most anticipated initial public offerings (IPOs) in history.
Facebook went public with a valuation of more than $100 billion. That's bigger than online retailing giant Amazon (current market capitalization of $95 billion), fast-food goliath McDonald's ($92 billion), and the global credit-card association Visa ($80 billion).
And based on 2011 earnings of $1 billion and revenue of $3.7 billion, Facebook shares were expensive – 100 times earnings and 27 times sales. For comparison, McDonald's trades at 17 times trailing earnings and 3.3 times sales... And it pays a 3% dividend. We know McDonald's will continue earning billions of dollars each year selling hamburgers, fries, and soda. We have no idea how Facebook will increase its earnings. It seems the market is embracing that uncertainty as well...
Today, shares of Facebook hit a new low of $28.25. The current market cap is $63 billion. The company is still overvalued – at 63 times 2011 earnings – and we expect it will go lower. Mark Hulbert, a contributor to Dow Jones MarketWatch, believes the stock will plummet from here... He titled his recent article "Facebook's stock should trade for $13.80."
How does he arrive at that specific number? In the article, Hulbert references a study on IPOs by a University of Florida professor and two University of California, Davis researchers. The study showed companies that went public between June 1996 and June 2010 grew revenues by an average of 212% in the five years following the IPO. Applying the same growth rate to Facebook, its annual revenue in five years will be $11.58 billion.
Hulbert assigns Facebook a future value of 5.51 times sales. That's Google's current price-to-sales multiple. Facebook and Google are viewed as peers, and both were hugely anticipated technology IPOs. It's a gross assumption, but it gives you a relative valuation. At that multiple, Facebook's market cap in five years will be $63.8 billion – the same as today's market cap.
As Hulbert points out, nobody will invest in Facebook today if the share price will be the same (or considerably lower based on the IPO price) in five years. So Facebook must sell investors on its growth potential. From the article…
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So in order to entice someone to invest in it today, Facebook needs to offer a handsome return. Assuming that its five-year return is equal to the stock market's long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80. |
Again, this article is riddled with assumptions. Facebook could discover a genius revenue model and blow away earnings and revenue expectations. But it has a long way to go...
This article puts the company's absurd valuation into perspective... and reminds us to avoid IPOs – especially IPOs whose "road show," the company's traveling pitch to spur investor interest before the debut, was compared to a "rock concert" by hedge-fund manager David Einhorn.
Also… Hulbert doesn't mention August 20, the date when Facebook insiders can begin selling shares. We'll bet skittish early holders will take profits and run, pushing shares down farther.
Shares of Zynga – the creator of popular online games FarmVille and Mafia Wars – also hit a 52-week low today. Shares of Zynga and Facebook are correlated because Zynga derives the majority of its customers and revenue from Facebook. (Its games are synced with the Facebook website.) Zynga shares started trading on December 16 at $11 and peaked at $15.91 in March. Today, shares trade for less than $6.
While Facebook and Zynga are plunging, shares of "boring" World Dominator Wal-Mart, the world's largest retailer, hit another 52-week high yesterday.
As Dan pointed out yesterday, the "most important country in the world" (Spain) is dominating headlines again... Spain's IBEX 35 – the country's benchmark stock index – is the worst-performing index for a developed market so far this year, down 27%. And today, Spain's biggest phone operator, Telefonica, hit a 52-week low. It's down 31% this year. The country's biggest bank, Banco Santander, also hit a 52-week low today.
Meanwhile, shares of Inditex, a Spanish clothing retailer, are up 9% this year. It overtook Telefonica as Spain's most valuable company, with a market cap of $53.7 billion. Inditex – controlled by Spain's richest man, Armancio Ortega – operates the Zara clothing brand. Since its IPO in 2001, Inditex has become the world's largest clothing retailer.
Ten-year Treasurys are down below 1.64% today, the lowest yield in 60 years. The investing herd is rushing to buy these bonds, which are still viewed as the world's safe-haven asset. They could always fall lower, which would push prices up. But the upside (in terms of capital gains) is capped... It's zero-bound. If yields on the 10-year did go negative at auction, the U.S. government would issue even more debt than we think is possible... People would be paying the government for the privilege of lending it money... (And that situation wouldn't last long.)
Regardless, the end game is higher yields for U.S. Treasurys. And as we saw in 1981 (when 10-year bonds yielded almost 16%), they can go much higher...
But for now, we're stuck with record-low yields. And inflation, which is running around 4% a year, will devour your wealth if your money just sits in savings accounts or government bonds. So we asked Dr. David Eifrig, editor of Retirement Millionaire and Retirement Trader, the best way to play these low yields…
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Most people can't borrow money at those extreme low rates. But you can buy companies that do (like Wells Fargo and Microsoft). Banks, for example, can use your savings, which you give them at zero percent, and make commercial loans at 8%-9%. |
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Mortgage REITs (like Annaly) are also a good play. They borrow money from federal funds and other lenders (at advantageous rates) and invest that in higher-yielding mortgage paper. It's also a good time to buy a house. You can borrow money at low, fixed rates. The current 30-year mortgage is 3.5%. |
In his latest Retirement Millionaire, Eifrig says he's bullish on stocks. All his indicators say they're heading higher. And of the 27 stocks in his model portfolio, he has labeled 20 as "strong buys." You can start reading Retirement Millionaire and access Eifrig's super-safe stock picks (in addition to his common-sense investment education and health tips) risk-free for four months. And if you don't like it, just let us know any time in those four months and we'll refund all your money, no questions asked. To subscribe (without watching a promotional video), click here.
As Digest readers know, we recently launched our newest trading service, DailyWealth Trader... This week, we opened the product to our "paid-up" subscribers. We're offering an outrageously low price. You can get started for just $49.
That's incredibly cheap, considering what you get. Every day the market is open, we're sharing investment insight and advice. It's designed to be a "daily digest" of the world's best trading ideas.
In the last few months, the service has introduced ideas from Dr. Eifrig... It's described trades from one of the world's most famed short-sellers... It's taught readers how to "leverage" recommendations from Dan Ferris' Extreme Value to double or triple what they'd normally make from his World Dominator stocks... And it has shared commentary from master trader Jeff Clark, editor of the S&A Short Report and Advanced Income.
But the real benefit is the training materials. Normally, you'd have to pay thousands – even tens of thousands – of dollars a year to have access to the educational videos and reports we've posted free for DailyWealth Trader readers.
Jeff himself recently called a trial run of DailyWealth Trader "the best $49 you'll ever spend." You'll find his comments below in the mailbag...
New 52-week highs (5/29/12): ProShares UltraShort Euro Fund (EUO) and Wal-Mart (WMT).
In today's mailbag, a lesson on patience. Send your feedback to feedback@stansberryresearch.com.
"Can someone please comment on MacDonalds. During last 6 months it has seen a gradual fall and today made a big drop ??? any reasoning behind this as a world dominator?" – Paid-up subscriber Sandra Straw
Goldsmith comment: Stocks fluctuate, Sandra, even the best ones. But let's consider the long view...
"'There Is No Such Thing As Teaching'… I ran across the title quotation in a story told by Monty Roberts, the famous "horse whisperer," in which he recounts something he learned from his best teacher that he later applied to his work with horses. It's a rather shocking assertion to say that there is 'no such thing as teaching'... especially to those of us who have given our lives to the profession. Here is the full quotation in context…
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Sister Agnes Patricia was the most influential teacher I ever knew. What I will always remember about her is her statement that there is no such thing as teaching — only learning. She believed that no teacher could ever teach anyone anything. Her task as a teacher was to create an environment in which the student can learn. Knowledge, she told us, standing very straight in her long black habit, her face framed by her white wimple, pointed at the top like the spire of a cathedral, needs to be pulled into the brain by the student, not pushed into it by the teacher. Knowledge is not to be forced on anyone. The brain has to be receptive, malleable, and most important, hungry for that knowledge. |
"How closely related that is to some of the 'eternal verities' that guide Golden Apple's Inquiry Science Institute: 'Teaching and learning are not synonymous.' 'We can teach, and teach well, without having students learn.' 'Knowledge is seldom transferred intact from the mind of the teacher to the mind of the student.' 'Knowledge is CONSTRUCTED in the mind of the learner.'
"If these assertions are true, what's a teacher to do, particularly in the current high stakes test environment? One of the most difficult lessons for us to learn as teachers is to step back from being the asker of all questions and the font of all answers, and to let students explore, question, design, ponder, and grow in their own way and in their own time. To an extent, some of this is beyond our control, given the rigid testing schedules and prescribed curricula most teachers must follow. But there is always a significant portion of the classroom experience that is within our control, and that's where our professional responsibility kicks in. Because the struggle is more often with our own need to control and direct the learning process than with external directives. But when we can challenge that need in ourselves for the benefit of our students, something wonderful happens…
"A counter point is that everyone is a 'teacher' by how they live and what they communicate but it doesn't stop there for it must be converted to learning by hard thinking." – Paid-up subscriber JA
The Best $49 You'll Ever Spend
By Jeff Clark
Ben's parents looked like they wanted to kill me.
Ben graduated from high school last week. He'll be going to UCLA in August to study finance. Ben wants to trade stocks and options for a living.
So at a fancy dinner party last week, while he was surrounded by family and close friends, Ben asked my advice on what classes to take at college. Without thinking, I laughed, put my hand on his shoulder, and said, "Ben... you're not going to learn anything from a high-priced college education."
The room fell silent. Ben's grandmother may have fainted. His mom stared at me with daggers in her eyes. And his dad looked ready to roll up his sleeves and call me outside.
I had forgotten that Ben's mom and dad both graduated from UCLA. In fact, many of the adults in the room held high-priced college degrees. So my comment went over about as well as insulting the Pope at a Catholic retreat.
I tried to recover by nervously muttering something about how wonderful the college experience is... about how he'll learn a bunch of stuff... he'll make lifelong friends and contacts... and he'll grow so much as a person over the next four years.
"But," I insisted, "you're not going to learn anything about trading in college."
Not long after that episode, I made some excuse to leave early, and Ben walked me and my wife to the door. That's when I gave Ben the advice he was looking for.
"Look," I said, "if you really want to learn how to trade, take $49 out of that stack of cash-stuffed graduation cards you just received and buy yourself a one-month subscription to DailyWealth Trader."
DailyWealth Trader is a new research service offered by Stansberry & Associates. Each day, managing editors Amber Mason and Brian Hunt cherry-pick through all the trading research published at S&A to come up what they think is the best trade of the day. The ideas may come from some of our most elite and expensive services, including my two newsletters – S&A Short Report and Advanced Income.
Amber and Brian may pull their trading ideas from the excellent writings of Dr. David Eifrig, Porter Stansberry, Dr. Steve Sjuggerud, or any of the other terrific S&A analysts. The goal is to come up with one solid trading idea every day the market is open.
That's 15 to 20 trade recommendations every month – for only $49. That works out to about $3 per trade. It's a great deal. But it's not the biggest benefit of DailyWealth Trader.
The real value to the service is behind the scenes – in the Training Center.
If you want to learn how to trade stocks and options, there's no better resource than the DailyWealth Trader Training Center. In it, you'll find special reports on numerous stock and option-trading strategies. You'll learn how to profit off volatility, use options to generate income, spot winning stock trades, and multiple other strategies to profit in the market.
This isn't the sort of "textbook" theory taught in a college classroom. This is real-world education from folks who've actually traded for a living.
And here's the best part...
As a subscriber to DailyWealth Trader, you also get access to my series of option-trading videos. You'll learn about the most effective trading techniques I've discovered over my 30-year trading career – ones I personally use every day. You'll learn the right way to use options to lower risk and increase returns. You'll learn how to generate a 3%-per-month income stream with a conservative option strategy. And you'll learn more complex spread, straddle, and option combination strategies.
Here's just a small sample of some of the feedback we've received from this video series...
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He takes a complex subject and makes it easy to understand. They are not long and boring like other seminars that put you to sleep. These are short, simple, and precise. Great job!! Now I know exactly what to watch for in the market, and exactly which strategy to employ. This is what I have been searching for for years, but no one is doing it in a "quick and understandable" format. – B.G. |
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Love the videos. Best options information I have seen in years. – L.F. |
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I've traded in options for about 15 years but your information concerning charts is most helpful. – T.K. |
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Your videos are helping me to put the pieces together and to have a strategy for making safe, logical, low-risk moves that will allow me to grow my portfolio by double digits every year going forward. Can't say "thank you" enough for something like that! – R.W. |
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Being a novice at the market, this is exactly what I am looking for. – K.M. |
Again... this stuff isn't taught in any college classroom. But it's critical information for anyone who wants to learn how to trade.
So here's exactly what I told Ben as I left the dinner party last week...
"You're going to spend four years and about $200,000 learning, in theory, how to make money in the stock market. You ought to at least spend one month and $49 to learn the practical approach."
A subscription to DailyWealth Trader costs just $49 per month. You'll get 15-20 trade recommendations every month. And you'll get full access to the Training Center, including all the special reports and my option video-education series.
If you don't like it for any reason – or you find that the service just isn't right for you – you can cancel within the first month for a full refund. But if you do like it... and I think you will... you're likely to find it's the best $49 you ever spent.
To learn more how to take a risk-free trial subscription to DailyWealth Trader (without watching a long video) click here. Or you can watch a video about DailyWealth Trader and the trading strategy we've called "S&A's greatest wealth secret" right here.
Best regards and good trading,
Jeff Clark
Good investing,
Sean Goldsmith
Baltimore, Maryland
May 30, 2012