The trick about playing chicken with the stock market is knowing when to flinch.
When it comes to shares of Facebook Inc. (Nasdaq: FB), it’s time to take the money and run.
If you’re new to the stock market, this is one of the hardest things you’ll ever learn to do — selling into strength. That means making your exit while there are still plenty of buyers.
Don’t wait until you see Jim Cramer scared and ranting on CNBC before you hit the sell button.
Why sell now?
One, there are lots of other stocks that are promising growth yet haven’t made a big move yet.
Two, Facebook’s stock has made a pretty big move for a company that’s one of the five largest (as measured by its $660 billion market cap) in the world.
I mean, shares are up 37% since I shouted “I Can’t Believe Facebook Stock Is This Cheap!” from the internet rooftops on March 10.
You’d have a 60% gain if you bought when the stock bottomed out at $139 a week later:
FB Is up 60% Since Its March Bottom
But that was then. This is now.
Facebook’s stock isn’t exactly cheap at this elevated level.
And there’s a group of undervalued stocks that investors should be paying a lot of attention to right now.
Don’t Pay Too Much for Facebook Shares
How do we measure “cheap” and “expensive” in individual stocks?
There are lots of different ways. None of them are perfect. None of them are guaranteed to turn you into legendary investor Warren Buffett.
But a simple method is the good ol’ price-to-earnings (P/E) ratio.
Take your favorite stock’s current price per share. Then look up what its annual earnings per share is expected to be in 2021.
(That is, presuming your favorite stock actually has profits — more than a few highfliers on the Nasdaq Composite Index have no earnings whatsoever.)
Anyway, divide the stock price by the annual earnings per share. Presto, you have a P/E ratio.
In Facebook’s case, it’s on track to earn $7.57 a share over the next four quarters. That gives the stock a P/E ratio of 31.
That happens to be Facebook’s highest P/E ratio since 2016.
Own the Next Great Stocks of the Coming Decade
As I noted a few weeks ago, a lot of the major tech stocks are in the process of topping.
Microsoft Corp. (Nasdaq: MSFT) is priced at its highest level — a P/E ratio of 31 — since the dot-com boom turned into a bust 20 years ago.
It’s highly likely that major Wall Street investors will rotate their funds into the undervalued post-pandemic stock plays for the next few years — travel, leisure, airlines, cruise lines, you name it.
Rotation is a healthy thing. But it’s only healthy if you own the next great stocks of the coming decade, not the overvalued has-beens of the last one.
Best of Good Buys,
Editor, Total Wealth Insider