Despite the hoopla surrounding Facebook Inc.'s blockbuster initial public offering, many financial advisers did their best to steer clients away from the social-networking giant's shares, pointing to an over-the-top valuation and record levels of insider selling.
“With over 900 million users, it would be pretty hard to argue that Facebook is not a good business, and we believe they have a good management team, but the price is where we fall down on this stock,” said Scott Schermerhorn, chief investment officer of Granite Investment Advisors, which manages $550 million in assets.
Mr. Schermerhorn, like many advisers, fielded questions from clients in recent weeks about whether to invest in shares of Facebook.
Knowing that the IPO price was equal to more than 105 times earnings and 25 times revenue, he has told clients to wait a few months for the initial hysteria to die down.
“I've heard arguments that normal valuation metrics don't apply here, and when I hear that, it reminds me of the late 1990s,” Mr. Schermerhorn said. “The reality is, Facebook should grow pretty rapidly, but if you're buying something at 105 times earnings — when the good news is already priced in — you have to be expecting better than the good news.”
Facebook Ticker:(FB), which began trading at about 11:30 a.m. ET on Friday, finished the day up 23 cents at $38.23 — giving the company a $110 billion market cap. As of 1:30 ET on Monday, the stock price had plunged more than 10%
George Feiger, chief executive of Contango Capital Advisors, a trust company and advisory firm with $3.3 billion under management, won't buy Facebook and is doing everything in his power to prevent his clients from buying the stock at current levels.
“I have no idea what the valuation should be, but I know this is the most hyped IPO in history, and insiders have been selling massive amounts of stock,” he said.
Related item: 10 reasons clients shouldn't invest in Facebook right now
In addition to pointing out the unprecedented levels of pre-market trading between Facebook insiders and private investors over the past few months, Mr. Feiger warns investors to be aware of the system they are buying into.
“You're dealing with something where the purpose of the exercise is to let people who know more about it than you do to cash out, but investors still haven't caught on to that,” he said.
“It's a masterpiece of hype, and investors have been manipulated to a level that's unbelievable. This thing should be written as a marketing textbook, and someone should get a medal for the way it was conducted. This is the way political campaigns are done,” Mr. Feiger said.
FUND OUTFLOWS
The irony is that mutual fund flow data show that investors have pulled more than $166 billion out of equity funds since the market bottomed in March 2009, despite the S&P 500's gaining more than 100%.
“It's crazy the way investors are pulling money out of equity funds, but they want to chase Facebook,” Mr. Schermerhorn said.
The stock market's recent bout of volatility, coupled with the underperformance of several high-profile social-media stocks, also should set off warning bells in the minds of investors, said Josef Schuster, chief executive of IPOX Capital LLC.
“The upside on this type of stock in the short to medium term is relatively limited, but the risk comes from the market as a whole,” he said.
“If you see what's been happening to the overall market lately, it's really time to be defensive, and Facebook is not a defensive stock. You don't buy IPOs in this environment,” Schuster said.
For some advisers, talking with clients about Facebook is just the latest step in a steady process of bringing them back down to reality.
“I've had some calls from clients about this, and my suggestion is that we wait because I think it's overpriced,” said Theodore Feight, owner of Creative Financial Design.
He is sticking to his strategy of avoiding stocks at the IPO, but he is reminded of some conversations he had with clients back in 2000 when he resisted buying IPO shares of Krispy Kreme Doughnuts Inc. (KKD).
“I had a couple of clients who really wanted Krispy Kreme, and they gave me grief about it for a few years,” he said.
The retail investor interest in Facebook stock is at “record level,” according to Paul Schatz, president of Heritage Capital LLC, but that doesn't mean he's willing to budge on his strict “no IPOs” rule.
“This is a huge retail deal, but I think it's way too high-profile. There's too much risk in it, and I don't think the reward is there,” he said.
“I tell my clients who really want it to at least wait a month or so for some selling by insiders, but personally, I couldn't have less interest in Facebook's stock,” Mr. Schatz said.
jbenjamin@investmentnews.com
