Facebook: Catch a Breakout

10/24/2014 8:00 am EST


Leo Fasciocco

Investment Columnist and Publisher, Ticker Tape Digest

Our latest breakout candidate operates a social networking Web site which enables people to stay connected with their friends and family and for marketers to engage with more than one billion monthly active users, asserts Leo Fasciocco, editor of Ticker Tape Digest.

Facebook (FB) works directly with advertisers, through traditional advertising agencies and with an ecosystem of agencies that specialize on Facebook advertising. The company currently operates 30 sales offices.

Marketers engage with subsets of its users based on information they have chosen to share with it such as their age, location, gender, or interests.

The stock came public in 2013 and traded at $45. It fell back to $17 late in the year. However, since then the stock has been pushing higher.

The stock broke out in early September, fell back, and then reemerged from the base as a breakout once again. A breakout to a new high would be very bullish and could draw in more buying.

This year, analysts are forecasting a 119% surge in profits to $1.31 a share from 60 cents a year ago. They have been aggressively raising their estimates.

Earnings for the upcoming third quarter ending in September should jump 91% to 32 cents a share from 17 cents the year before.

The estimate has been boosted by analysts and we see chances for an upside surprise. The company topped the consensus three out of the past four quarters.

Looking out to the fourth quarter, the Street expects an 88% leap in profits to 38 cents a share from 20 cents the prior year. That is an acceleration in quarterly earnings growth, which is bullish.

The stock sells with a price-earnings ratio of 60. That is high. Next year, the Street projects earnings will climb 28% to $1.69 a share from the anticipated $1.31 this year.

Institutional sponsorship is excellent. The largest fund holder is the 4-star rated Fidelity Contrafund, which was a recent buyer of 1.4 million shares.

Another big buyer recently was the T. Rowe Price Growth Stock Fund, which purchased 1 million shares.

We rate FB a good intermediate-term play provided earnings remain on course. We suggest a stop buy near $79.70 to catch a breakout. We are targeting FB for a move to $98 after a breakout. After the stock has broken out, a protective stop can be placed near $75.

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