Investing

Did You Buy Shares in Facebook? Should You?

By Kanwal Sarai
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investing facebookOn Friday (May 18, 2012) Facebook became a public company. Facebook shares began trading on the stock market, meaning anyone could now own a part of the company. But should you have bought shares in Faceboook? The answer is no.

Facebook shares started trading at $38 each, which valued the company at $104 billion. At $104 billion Facebook became the most valued company ever to go public. Here are some other companies and what they are worth today:

  • Amazon is worth 97.01 Billion
  • McDonald’s, 92.82 Billion
  • Ford, 38.89 Billion
  • Royal Bank of Canada (the largest in Canada), 74.89 Billion

Facebook becoming a public company was a much hyped event. Kind of like Apple announcing the first iPhone, or the release of a major motion picture. The key is to cut thru the hype and look at the facts. I look at the facts when deciding where to invest my hard earned money. I mentioned at the beginning that you should not invest in Facebook, and here are my reasons why:

1. Facebook does not have a long-term track record of consistently increasing earning. I generally look for companies that have consistently increased earnings for +10 years.

2. Facebook does not have a long-term track record of consistently increasing dividends. I generally look for companies that have consistently increased dividends for +10 years. In fact Facebook does not pay any dividends. I use the average dividend yield to help me determine if a stock is undervalued, but without a dividend I can’t do this.

3. I generally look for companies with a P/E ratio of around 12, less than 12 is even better. Last Friday (May 18) Facebook’s P/E ratio went over 100.

Applying the 12 Rules of Simply Investing I find that Facebook easily fails 8 out of the 12 Rules. Therefore in my opinion Facebook shares should be avoided for now.

Remember these words from Warren Buffet, “Be fearful when others are greedy, and be greedy when others are fearful.” On May 18, 2012 we saw example after example of human greed, people hoping to make a quick profit. When you see major hype and greed in progress, heed Mr. Buffett’s words of wisdom.

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Image courtesy of Iconspedia

Kanwal Sarai

With more than 27 years of investing experience and a passion for investing and teaching, I demystify the world of investing. My goal is to help you grow your net worth by investing in quality dividend paying stocks. Build your own stream of increasing income today.

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