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Editor's note: Just before Facebook shares started trading, the new issue of Steve Sjuggerud's True Wealth came out. Inside that issue, Steve called the Facebook IPO an investor's "Stupid Test"... and he explained why. It turns out, Steve was exactly right...
Shares of Facebook have lost one-quarter of their value in two weeks. So we asked Steve if he thought Facebook was still a bad buy. He said, "My story from two weeks ago still stands." Here's the story...

The Stupid Test

By Dr. Steve Sjuggerud
Thursday, May 31, 2012

Adapted from the True Wealth newsletter, May 18, 2012. (All numbers quoted below are as Steve originally wrote them.) 
My mom doesn't buy stocks. "Too risky," she says. But last week, she asked me what I thought about Facebook...
"Facebook might be a good product... but it's a horrible stock," I said. "I would never buy it." 
Facebook shares are an investor's "Stupid Test"...
If you buy shares of Facebook, I believe you will never succeed as an investor.
The way to make money through investments is simple...
You buy an asset when it is completely ignored and cheap (like gold a decade ago).
•   You sell an asset when it is popular and expensive (like Internet stocks in 2000 or real estate in 2006).
Simple and sensible, right? 
Right now, Facebook is outrageously popular and ridiculously expensive... so what should you do? Should you buy it? Or sell it? 
In order to become a successful long-term investor, it's critical you understand The Stupid Test.
There are two parts to the Stupid Test for investors: popularity and price. Let's tackle popularity first...
Facebook is the largest Internet-stock IPO ("initial public offering") in history – bigger than anything in the Internet boom in 2000 and bigger than Google's IPO. At $38 a share, it is the 23rd-biggest stock in America.
I can't remember this much hype since the dot-com peak in 2000.
The stories are crazy... Parents are cashing in their kids' college savings accounts and putting all the money into Facebook shares. And talk about popular... While promoting their stock this week, the Facebook guys – including 28-year-old founder Mark Zuckerberg – "were treated like rock stars," The Economist magazine wrote.
Long [lines] snaked out of hotels where they were holding meetings, as investors lined up to hang on their every word. Hordes of photographers rushed to take pictures of Mr. Zuckerberg, in his trademark hoodie, as he and his colleagues were whisked off to waiting limousines.
Does it sound like Facebook is "ignored" or "hated" to you? 
In all this hype, you have to wonder... Who is selling? 
If Facebook is such a great stock to own, it must be a bunch of REAL DUMMIES selling right now, right? What fools! Who are these dummies who are selling? Let's take a look: 
•   Facebook founder Mark Zuckerberg is selling some shares. Actually, it's more than "some." Zuckerberg cashed in over $1 billion worth of stock today. What a real dummy this guy must be for selling now, huh? 
•   Peter Thiel – the founder of PayPal and a Facebook board member since 2005 – sold $600 million worth of shares today. This guy can't be that smart... right? I mean, what's does the founder of PayPal know about how money works? 
•   Facebook board member and LinkedIn founder James Breyer is selling $1.7 billion worth. What a fool! 
•   Wall Street titan Goldman Sachs is selling over $1 billion worth. I guess Goldman Sachs knows nothing about investing money either, huh? 
Wait... Who are the REAL dummies here? These guys... or the investing public that is gobbling this stuff up? 
Facebook might be a decent product... But it's a terrible stock to buy today. Let me explain...
Facebook shares are so outrageously expensive, they can't possibly deliver on the hype.
Wal-Mart, for example, had $450 billion in sales in the last 12 months. And its stock market value today is around $200 billion.
Facebook had $3.7 billion in sales in the last 12 months. And its stock market value at $38 per share is around $104 billion.
Look, if Facebook grew its sales 50-fold – from roughly $4 billion to roughly $200 billion – its shares would STILL be more expensive than Wal-Mart shares (based on the price-to-sales ratio).
Dreamers think that Facebook will come up with new ways to make money. Facebook needs to dream up 50 times more revenue than it has today. So far, that isn't happening...
In the first quarter of 2012 (Q1 2012), Facebook's sales were actually down 6% from the previous quarter (Q4 2011). Earnings were down 32%. Facebook blamed the decline in sales and earnings on "seasonal factors." But that doesn't fly – earnings were down 12% this quarter from the same period a year ago (Q1 2011). For comparison, Wal-Mart's earnings were UP 10% in the first quarter from the same period a year ago.
In short, Facebook's business isn't growing nearly fast enough for the stock to be worth buying today. 
This Facebook hype is just like the hype back at the peak of the dot-com days in 2000, when everyone wanted Internet stocks at crazy prices – even when they had no money-making business model.
Facebook shares are not cheap and ignored. They are the complete opposite – they are outrageously expensive and insanely overhyped. If you want to make money as an investor, this is NOT what you want to buy.
And if you do want to buy it, you've failed the Stupid Test.  
If you bought Facebook, I strongly urge you to get rid of it... It is ridiculously overhyped and overpriced.
Good investing, 
Steve Sjuggerud

Further Reading:

Reading Larsen's advice in November could have helped you avoid the temptations of Facebook's IPO. A sampling of last year's "big name" public offerings showed losses of 20% to 40% in just months. Find out why he calls them "one of the market's most dangerous trades" here: A Serious Warning to Amateur Investors.

Market Notes


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