Gloom makes us glad.
That’s a line from “Contrarian Investing,” the 1998 book I co-authored with a New York money manager. And it means that against-the-crowd investors like me like to find stocks that have been beaten down from their highs.
Most investors don’t think that way. They know of the mantra “Buy low and sell high” – but when it comes time to actually buy a beaten-down stock, emotion overcomes intellect, and they run to the sidelines. They “see” the move as too risky to make.
As my co-author and I found out in the process of writing our book, beaten-down stocks – as a group – are actually lower-risk/higher-upside investments than their high-flying alternatives.
And in the face of the coronavirus-pandemic market, low-risk investments are the ones you should be looking for.
That’s what we’re going to deliver today – in part.
We’re bringing you a low-risk stock – with a bonus. This is a stock that:
- Is trading at a discount – down nearly a quarter from its peak.
- Has a hefty “margin of safety” – with a ton of cash and no debt.
- Has a big upside – the stock should easily double by 2025, a great return for a stock with lower downside risk.
Let’s run through each of these, and you’ll see why I’m so revved up about a stock that – on its face – seems so obvious.
Yeah, a “hidden in plain sight” wealth play that’s so obvious most folks will ignore it…
“Cheap” Isn’t Bad
The stock I’m giving you today is one that Money Morning Capital Wave Strategist Shah Gilani and I brought you back in February 2014, when it was trading at just under $69.
The stock soared from there.
At the peak of the “Super Bull,” it traded north of $224 – for a peak gain of 225%.
Since then, the stock has skidded about 22%. It now trades at roughly $174.
For a dyed-in-the-wool contrarian investor like me, a decline of that magnitude in an innovative leader is an unqualified “interest-peaker.”
And make no mistake; I am interested. That’s because in today’s coronavirus-ridden, crisis-mode market, this is the kind of stock you want to have in your portfolio.
But not just because of the sell-off…
The stock is none other than social media heavyweight Facebook Inc. (NASDAQ: FB).
Just look at Facebook’s price/earnings (P/E) ratio. It’s right now trading at a “trailing” P/E of 27 and a “forward” P/E of about 19 – in essence, the lowest valuation level in five years.
That’s crucial, given the growth we see – something I’ll return to in a few minutes.
The “Margin of Safety Net”
Classic value investors like Benjamin Graham and Warren Buffett talk extensively about a “margin of safety” – cash or other assets that provide a company with a cushion against times of trouble.
That kind of a financial “safety net” is great at any time. But during a stretch as uncertain as this one, it can mean the difference between a firm’s success or outright failure.
That cash can be used to cover lean periods, to effectively increase earnings per share via stock buybacks, to boost dividends (which is not an issue with Facebook, since it doesn’t yet pay a dividend), or to finance – innovation for future growth.
Cash can also create opportunities: During bear markets, when share prices are down, or during economic downturns or outright recessions, a war chest of cash can allow a company to buy competitors, new technologies, or companies that will pave the way into new venues.
At the close of 2019, Facebook had $54 billion in cash and short-term investments. And that’s “net cash,” since Facebook has essentially no long-term debt to speak of.
That’s plenty of cash to invest in growth, which we’ll talk about next.
Forecasting a Double (and Then Some)
I’m a big car guy – something that, in high school and college, we referred to as a “Motorhead.”
So I’ve seen firsthand what a take-no-prisoners Facebook has become. When I started on a Model A Ford Hot Rod pickup project six or eight years ago, I hunted for rare parts on Craigslist.
In my area – north of Baltimore – the cars-and-parts-listing section of Craigslist has become a kind of “ghost town” – and all my friends and I now hunt for stuff on Facebook Marketplace. There’s a “symbiosis” in doing so, because Facebook has all those great car and Hot Rod interest groups that I belong to.
Facebook is pushing to better use some of its other franchises, too.
It’s going to better utilize Instagram and WhatsApp – platforms that each boast active daily user bases a billion strong.
The company’s Watch TV platform also has great promise.
And Facebook has designs on the online dating market in the bigger, developed economies.
Despite controversies that still linger from the last election, Facebook is also one of today’s biggest digital advertising platforms – a fact that’s only aided by the loyal user base the company possesses.
The coronavirus pandemic is hindering Facebook’s ad revenue in the short term – possibly significantly. Of the advertisers that generated $70.7 billion in revenue for Facebook last year, a hefty slice are small businesses that are taking it on the chin as a result of the COVID-19 disaster, MarketWatch says.
In the fourth quarter, Facebook reported $21.08 billion in revenue – almost all of it from advertising.
But other pandemic-related gains could provide a longer-term tailwind.
Late last month, Facebook said total messaging across its ecosystem has rocketed 50% across countries where the virus is escalating – with video messaging on Messenger and WhatsApp more than doubling. In Italy, time spent on Facebook has soared 70% during the pandemic, MarketWatch reported.
All of these low-risk investment factors we’ve talked about here today translate into strong profit growth over the next five years.
And even when using especially conservative numbers, I still believe that it will allow Facebook shares to zoom about 126% over that stretch of time.
The table below illustrates projected earnings-per-share (EPS) growth on a year-by-year basis. By using the current $174 trading price as the baseline and projecting stock-price growth in lockstep with EPS growth, we get to a stock price of nearly $394 in 2025.
And I believe that’s conservative.
Sources: Reuters, Private Briefing Research.
I’ll be candid: This is an overly simplistic way of “modeling” the company’s financial trends and forecasting its share price. But I wanted to find an easy-to-comprehend way to show how Facebook’s profits – and its stock price – could advance over the next five years.
Gains of this magnitude – on a low-risk stock with a huge margin of safety – make this a winner.
And it’s a winner we’ll continue to follow.
If you own Facebook, continue to “accumulate” shares. If you don’t, create a foundational position here – and add to your stake on pullbacks or as you come into additional cash.
— William Patalon III
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Source: Money Morning