Pivotal Research Downgrades Facebook to a Sell


Fundamental stock analysts don’t usually like using the “s” word, and by the time they tell you to sell, you should have sold a long time ago. This sell call is more proactive.

Pivotal Research analyst Michael Levine just sounded the alarm on Facebook, at a time where the stock doesn’t really look all that bad. There are better stocks out there right now, to be sure, but stocks rarely get a sell rating unless things are really bad indeed, where people have already dropped a bundle and should have sold some time ago if they had much sense or were not so stubborn.

Take Franklin Resources, for instance. This stock traded north of $58 six years ago, and has played a game of limbo ever since. It now trades around $25, and while two-thirds of analysts have it as a sell after all this time, providing it with the highest percentage of sell ratings in the S&P 500, a third of these analysts haven’t given up on it and still have it as a hold. We can only wonder how much lower this and other distressed stocks that are still holds in the eyes of some have to go before they recognize these trails of tears.

We even see stocks that give back 90% or more still being a hold with some analysts, and we need to wonder whether the goal here is to lose money instead of trying to make it, given that they want us to hold some of the worst stocks ever to the point where we just get crushed.

The idea of holding a stock when it is bearish just does not even make any sense, but no matter, we can pretend. There should only be two main categories with stocks, buy and sell, and even though we could further refine this with things like strong buy or strong sell, it never makes sense to hold a stock that should not be bought.

This just isn’t a little bad, it’s absolutely terrible, where we’re told the expectation isn’t positive enough to buy it but somehow, it’s OK to hold it and grin and bear it. There should be no grinning when we have to bear it though, unless we enjoy losing when we don’t need to.

Even with buy recommendations, these could be just mildly bullish, or not even bullish at all in some cases where analysts pin their hopes on things other than reality, when the stock is dropping and they are hoping for something else.

Levine’s recommendation to sell Facebook is amazingly well timed though as far as these things go, and we not only agree with the sell, but agree with the timing as well for the most part. This is a little late but not by that much.

Levine doesn’t have the benefit of looking at charts as we do, and while it may seem funny or at least should seem funny that someone would recommend what we do with a stock without even really looking, that’s the life they have chosen, to mostly base their recommendations on old news, things that have already happened, and pretend that these things will continue their influence when they are already priced in.

Sometimes they get lucky though and the direction that they think a stock may be going by looking into their crystal balls does correspond with the direction of the stock enough to be valid enough, and this is one of those cases.

Never mind that Levine had Facebook as a buy as recently as January 22, when it was trading at $221, which he moved to a hold on January 30 at $209. This is all happening pretty quickly in his view as he’s now telling us to sell with the price at $207.

Facebook’s outlook hasn’t changed by that much over this time, although we have seen $14 a share of negative views showing their ugly heads, but this isn’t a lot really for a stock that moves this much. It did make an all-time high three weeks ago at the time of his last buy recommendation, and while there are some concerns out there about changes in cookie policies, a 6% drop doesn’t exactly show panic or even that much concern.

Levine believes these new batches of cookies will materially affect the company’s profits, but even if he is right, we’re not talking about all that much of a hit and nothing that warrants being called a “cookie-pocalypse,” as Levine believes it will be. This isn’t even a hand puppet monster as it turns out, let alone a real one.

Perhaps his fear was inspired by how people line up to rail about targeted advertising, seeing this as some sort of serious affront to our privacy, even though there is only a computer and ourselves involved and the computers are on our side and are looking to help us, something we normally allow with pleasure.

Sure, Facebook and other online advertisers can charge more and make more with better targeted ads, but given that we’re on the receiving end of this, and will be viewing ads anyway, why it wouldn’t be better for us to be served up ads that actually conform to our interests much better than not is a very good question indeed. The reality of all this is that the death of this or even a reduction in it has been greatly exaggerated.

It turns out that the clear and present danger of Google’s new cookie policy that just came into effect is more benign than apocalyptic, unless you think that the world will end because sites have to specify more as to how their cookies will work.

There is another wave that is set to hit us in 2 years, when Google will start punishing advertisers for not complying with their transparency demands and has stated that they will severely restrict access to browsing histories if their demands are not met.

Google’s goal here isn’t to stifle third party advertisers, it is to take more safeguards against fraudulent attacks, which is what this new policy is aimed at. The rule is called the Incrementally Better Cookie Policy, and the better part is reducing the risk of sensitive data such as financial information from leaking from the sensitive sites to fraudsters by way of cookie tracking.

Inter-site cookie access will be limited to those who have defined their access, and have a legitimate purpose to do this, as opposed to malicious sites and applications who are not in a position to provide this additional data. This isn’t a profit killer for the good guys, it’s just one for the crooks.

It’s not that clear why Levine sees this as bashing Facebook’s profits and its stock, other than his saying that this will restrict access to inter-site targeting, which is true, but we also need to know who will be restricted and if Facebook and other advertisers need to worry about this very much. Sure, they will need to pay their programmers more, but nothing that should have us rounding up animals and beginning construction of an ark.

Levine is probably not alone in being a little spooked by this, and anyone who reads his recommendations may get caught up in this confusion, but this story is out and has been digested and the stock hasn’t really taken much of a hit. The stock is down a little but it wasn’t from seeing the Cookie Monster knocking on the door, it was due to their recent earnings call that was met with a little disfavor by the market in spite of their beating estimates.

Facebook’s fundamentals still look fine though, and even though some people worry about the company being broken up at some point, including Levine, there’s nothing on the table that would be persuasive enough to have us needing to worry about this.

It Turns Out That There Are Real Reasons to Not Want to be In Facebook Now

None of this is behind why we agree with his recommendation right now, as our focus is on how much the market is liking the stock, and we are not seeing enough to like to want to be in this right now.

This doesn’t even mean that we expect the stock’s price to drop, but we like stocks that are primed to move up nicely, not just in a mediocre way, and we also prefer stocks that don’t wilt anywhere near as much as Facebook does under pressure.

We can start with that part, as this is enough to make it a sell. We really don’t like the fact that Facebook stock gave back over twice as much as the market did in the latter part of 2018, with almost half of Facebook’s hair chopped off and a good part of it happening when the market was rising.

Last May, while the market gave back 6%, Facebook gave up 14%, among other recent situations where Facebook got a lot more rattled than the average stock. If real bears show up, the much bigger swat that Facebook will take will really leave them reeling and have their investors really grinding their teeth.

The real issue here isn’t even the magnitude of its pullbacks as much as it is the less friendly ratio of its beta, or relative movement, on the upside compared to the downside. It can be perfectly fine to ride a stock with more downside as long it has enough additional upside to make this worth our while, like Apple for instance, but if we can’t justify this additional risk, we shouldn’t be taking these chances.

Some might argue that we could just exit when times get a little tough, and while you can indeed use this as a good tool, the problem with investors is that they do not know when this time to go arrives, and their uneducated guesses are a lot like trying to pin the tail on the donkey blindfolded. It’s just better for them to not have them in these situations.

Even if we are really good at this, we still need to wonder why we rode something up too little even if our exits were perfect, even if we could see the future and knew exactly where the tops were. When someone else’s top is a lot higher, that is enough to want to look away from yours. The grass may not always be greener on the other side, but it is if it is taller. Taller grass holds life-giving water better and the shorter stuff is more likely to brown.

Facebook is still below its highs of July 2018, and although they had fully recovered a couple of weeks ago, they are back below the line now. Apple, in comparison, broke through its barrier last September and is up over 50% overall since July 2018. A lot of stocks are over their July 2020 high in fact, although Facebook is not one of them.

July does not seem to be Facebook’s month, and in spite of the stock going up a very impressive 65% last year, this was all in the first 7 months and they have only moved up a hair since, and it has now stalled in this area and now heading the other way.

That’s the biggest reason not to hold Facebook right now, whether that means not buying it or selling it, as this shows us pretty clearly that the love that the market has had for Facebook is once again on the wane. This does not bode well for its comparative value in the market.

Facebook is also behaving too much like a bucking bronco these days, where it bucked off its rider in July 2018, they got back on the horse in January of 2019, got bucked off again last July, got back on in October, leaving them in the same place as they started. It’s also now looking like this horse is ready to buck again.

The failure of Facebook to break out last month is also a concern, especially since we’re on the way down since. This move down hasn’t been big enough to be much of a concern in itself, but the sum of all these things leave the stock looking decidedly not bullish enough.

Not bullish enough is the threshold we need to use here, and this is one of the biggest things that investors don’t get, and few people seem to understand this all that well. They may think it enough to be in something moving their way, but like horses that wear blinders, they don’t see all the horses passing them and all the dust that is kicked in their face.

Facebook will be fine long term, and better than fine probably, but there are just too many better horses out there right now to want to ride this one. Levine did pin the tail in the right place this time, but it’s just better and easier to do this with our eyes open.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: andrew@marketreview.com

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