Breakout

"Like" It or Not Facebook Earned Its Place in the S&P 500

Jeff Macke
Breakout

Shares of Facebook (FB) got a boost this week after it was announced on Wednesday that the company would be added to the S&P500 (^GSPC) on December 20th. The news was a fitting climax to a year that’s seen Facebook go from IPO laughing stock to mainstay of growth portfolios everywhere.

OptionMonster’s Jon Najarian says Facebook’s inclusion is recognition that the company has become the unquestioned leader of social media. While the stock is hardly cheap, it’s impossible to ignore the fact that Facebook’s earnings have grown almost tenfold over the last four quarters. More impressive still, Facebook has cracked the code on generating income from mobile advertising, a business that was largely hypothetical in terms of profitability at the start of the year.

Related: Facebook Thriving as Ad Money Goes Mobile

In the attached clip Najarian says he expects Facebook shares to be strong heading into December 20th, and perhaps beyond, as fund managers look to dress up their portfolios into the end of the year. 

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As a general rule of thumb traders would rather sell into strength on news such as inclusion into an index.  Facebook’s fundamentals are obviously not impacted by Standard & Poor’s stamp of approval and the impact of ETFs and index funds being forced to buy shares is generally overstated. Loathe though fund managers may be to add shares of Facebook when shares have been running, Najarian says they don’t have a choice thanks to the sheer size of FB’s market cap and momentum. In essence the only sin greater than bidding for shares that are already up 10% on news unrelated to fundamentals is running a fund that’s supposed to mirror the performance of the S&P 500 without including shares of the 26th largest company in America in terms of market cap.

As for Facebook’s competitive positioning, it’s already become the grandpa of social media. The company’s greatest accomplishment this year was proving the ability to stay at least somewhat relevant with young people through the purchase of Instagram. With half the world already signed up for Facebook, the greatest risk facing the company is becoming what amounts to Microsoft circa 2000 - 2012 while Twitter (TWTR) plays the role of a faster, hipper Apple (AAPL).

Related: Facebook Exposes Twitter’s Teen Trouble

For the record Najarian is long Twitter for his daughter and has a synthetic long position in Facebook via call options. Those interested in learning more about Najarian’s option trading strategy should check out his book “How I Trade Options."

[ Disclosure:  At the time of publication Jeff Macke owned shares of Twitter ] 

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