Is Facebook [FB] the New Elephant in the Room?

Is Facebook FB the New Elephant in the RoomThe ‘Elephant in the living room’ is an English saying regarding an unaddressed but evident-to-all truth.  The link between cigarette smoking and cancer is a good example that big tobacco aggressively suppressed in the 1960s and 1970s.

My elephant in the room was subtle and had to do with stock analysis.  From the sidelines over the years I routinely watched stocks that doubled, tripled or more in price while everybody in my academic finance circle was talking about but not buying shares.

Like many investors who start as dumb money I did not understand that the best returns are in buying stocks rising into new highs.  Better yet if they have massive public attention and thus equity subscription.

I did not buy in my beginning days as a stock investor because I refused to pay attention to the elephants in my living room.  These elephants have names like BestBuy, Starbucks Amazon, Microsoft, and Google.

Even at a hundred these stocks had room to grow!

Facebook (FB) has been acting like the new Elephant in the Room.  People still ignore it like a ‘bad’ stock because it didn’t do well post-IPO.

But the earnings have been stellar and improving quarter after quarter.

And here is an important clue that something is up.  One of the smartest researchers in finance is Professor Fischer Black.

Dr. Black finished his Ph.D. in applied mathematics at Harvard University. He is the sharpest on the team that created the Black-Scholes Option Pricing Model along with Myron Scholes.

In 1975 Fischer Black wrote an article to help market participants understand some of the far reaching implications of the model that would eventually land him the Nobel Prize in economics.

The article entitled ‘Fact and Fantasy in the Use of Options’ explains that when smart money information traders hit the market with options they do so through long calls or puts. This said that the ratio of puts to calls in terms of option trading volume or derivative contract open interest should tip the hand of smart money.

In the last two weeks we have seen negative earnings posted from Apple (AAPL) and positive from Facebook (FB).  You probably know this.

But here is something I bet you did not know.

The ratio of puts was higher for Apple (AAPL) the day before announcement (just as professor Fischer Black of the University of Chicago predicted), the earnings came out negative the next, the stock tanked. But the calls were mysteriously higher than puts for Facebook (FB) the day before press, the earnings came out positive 24 hours later and I made half as much as my entire professor year-long salary in 1 second on open.

Become a student in one of my financial courses for weekly market updates and access to question me.  Grab any of the offers below to accelerate your investment learning now.

Doc Brown

 

 

-Doc Brown

Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico

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