Facebook (Symbol: FB) has been a name that is familiar to most, if not all of us. At this point of time, I'm pretty sure every one of you who is reading this has/had a facebook account. As of Oct 2019, Facebook still remains to be the most popular social network. A report from CNET last year has show that FB has been losing users. Even their crown jewel, Instagram, is now seeing a drop in its user growth.
So, with all these headwinds, is FB still a good stock to buy? Let's read on.
How has it performed in the past year?
Like most other tech stocks, FB has been mostly on an uptrend for the past year, especially since the last quarter of 2019.
How does it compare against the major US indices then?
Like most US stocks, FB share has been moving quite in tandem with the major US indices. Here are the r coefficients of the respective trend lines.
Sadly, all the major US indices still outperforms FB share. So you are still better off buying these indices in this case.
Now, one important factor in trading stocks is also to take note of the various technical indicators. One of the commonly used indicators has been the Simple Moving Average (SMA). Using Simple Moving Average, we are able to better tell how the price trend has been like. For eg, if SMA50 (50-day Simple Moving Average) rises above SMA200 (200-day Simple Moving Average), a golden sign arises which represents a bullish signal. Similarly, if SMA50 drops below SMA200, a death cross arises which represents a bearish sign. The more such crossovers happen, the more volatile the prices are deem to be.
I personally prefer to use SMA20 and SMA50 as there is less "lag" to the actual price chart since it is shorter term in nature, and would like to see how does the crossover chart look like in comparison to the price chart.
You can see that there are five instances where the SMA20 crosses the SMA50. The first occurs in end Jan/Feb 2019 where SMA20 rises above SMA50 (bullish sign). One occurs some time in Jun 2019 where the SMA20 drops below SMA50 (bearish sign). The SMA20 then quickly rises above SMA50 again in Jul 2019, only to drop below SMA50 again in Aug 2019 and then finally crosses SMA50 again near Nov 2019.
What happens if you buy FB during end Jan/Feb 2019 when SMA 20 rises above SMA50 and only sell it when the SMA20 drop above SMA50 (rise and repeat accordingly)? Would you have made a bigger profit? Let's take a look.
If you were to buy FB on 14 Jan 2019 and hold it till now with an initial capital of 1000USD, your 1000USD will have turned into 1500USD.
If you were to adopt the method as described above to rely on these bullish/bearish signal, your 1000USD will have turned into 1847USD instead. In this case, it's better to rely on SMA20/50 to aid you in buying/selling FB as it results in a greater profit. This usually works better when the stock price is volatile in nature, like TSLA. However, we have only used SMA20 and SMA50 in this case with a very short time horizon of 1 year. Results might potentially be different if you use other SMA values or extend the time horizon.
Sentiment Analysis is another area where data science has been applied to finance to better understand if people sentiments has any effect on stock prices. In this case, I will attempt to try to assign a quantitative value to people sentiments on Facebook to see if there is a direct correlation between people sentiments and FB stock price.
In this case, I extracted FB sentiment data from Sentdex which pulls data from a variety of sources such as Reuters, Yahoo Finance, Bloomberg, Forbes etc and assigns a value to the general sentiment on a particular topic.
Here is the scale, ranging from a value of -3 (strongly negative) to 6 (strongly positive)
6 - Strongest positive sentiment
5 - Extremely strong, positive, sentiment
4 - Very strong, positive, sentiment
3 - Strong, positive sentiment
2 - Substantially positive sentiment
1 - Barely positive sentiment
0 - Neutral sentiment
-1 - Sentiment trending into negatives
-2 - Weak negative sentiment
-3 - Strongest negative sentiment.
To ensure higher accuracy in the data value, I use the Simple Moving Average of the sentiment value across a period of 5 days instead.
Here is how it looks like (as an example)
I extracted the sentiment value over a duration of 1 year, and cross examine it against AAPL stock price in a scatter plot. Here is how it looks like.
The r coefficient for the trend line is 0.54, which suggests there is a good correlation between people sentiments and FB share price. In short, you can assume people sentiments do have an effect on the FB share price. This warrants a closer look into bettering this analysis method and I will probably seek to explore that in a separate post.
FB current has a PE ratio of 34.6X is slightly more than the industry average of 30.4X. Based on PEG ratio, it current has a value of 1.8X which is a poor value. It is also currently overvalued based on its PB ratio of 6.6X as compared to the industry average of 2.7X.
However, *drum rolls*
It has excellent financial health and most importantly, no debt! Gasp!
Its forecasted annual earnings growth is also expected to be 19.1% which is higher than both the industry and market growth. As such, FB could potentially be a stock that will be a winner for your portfolio in the years ahead even though it might be overvalued for now. Food for thought yay?
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