Facebook Inc (FB)’s Sell-off May Provide Entry Opportunity

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Facebook Inc (NASDAQ:FB) was one of the stocks affected by the market pullback and sell-off recently, along with several other Internet and consumer stocks which had high multiples. Now, however, shares have come down, and Stifel analysts think there may be some good options for investors.

Facebook Inc (FB)'s Sell-off May Provide Entry Opportunity

Facebook shares retreat 21%

In a note dated April 8, 2014, analysts Michael Heinz and Brian Donlin refer to a noted written this week by their colleague Jordan Rohan. He noted that Facebook Inc (NASDAQ:FB) joined other Internet stocks in in being sold off recently even though the company continues to show momentum in its fundamentals.

According to the analyst, Facebook Inc (NASDAQ:FB) is now trading at about the same forward price to earnings ratio it did about a year ago. That’s even after adjusting from the approximately 10% dilution because of the social network’s recent acquisitions and assuming no contribution from earnings. The Stifel team reports that their checks suggest Facebook is turning into a more and more central part of companies’ online marketing, search and display budgets. Because of this, they think the social network will post solid results for the next several quarters.

Sell puts, buy calls for Facebook

The Stifel team suggests that investors might want to consider selling the May 50 put at $1.73 and buying the May 60 / 70 call spread at $2.57, which would be a net debit of 84 cents. They say this provides investors with “synthetic long exposure” heading into Facebook Inc (NASDAQ:FB)’s next earnings report. They also say it offers some extra time on the back end for any potential upside which could result from the earnings release.

They also say that this particular trade with the put-call skew raised offers “an effective way to position for upside in a low-cost way, while providing a 13% downside cushion to the adjusted long entry point, which is set by selling the May 50 put.

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