The Only Social Media Play I’m Recommending Right Now

Keith Fitz-Gerald Dec 12, 2014
30 

Earlier this week we talked about the secret I wish everybody knew when it comes to market timing, and took a look at one of the most valuable Total Wealth tools of all – the Put/Call Ratio. We covered actions you can take right now to maximize your returns.

I also promised you a look at one great trade in particular involving a current social media darling. Today I’d like to keep that promise.

If you’ve been with me for a while, you already know I don’t like social media stocks. They’re not hooked into our unstoppable trends (nope, not even Technology). Their products are “nice to have” instead of “need to have.” And most of them have no real way to make money.

But that’s the thing about tactics…

If you have the right trading tactics, you can squeeze profit out of any stock. Even ones you don’t like.

In this case, I think betting on one stock’s failure may be far more profitable than betting on its success.

I know that this may seem un-American or somehow unethical, but shorting a stock – that is, betting on its decline – is a killer tactic and can be a fabulously profitable tactic used to build your wealth.

That’s a tactic we’ve talked about, but if you’re not familiar with shorting, don’t worry. I’ve got you covered with a special sidebar in a few minutes. So let’s get back to the meat and potatoes.

Here’s the thinking and here’s why #ShortingTwitter is the only social media play I like right now…

As I noted in Wednesday’s column, the Put/Call Ratio has warned of the potential for a pullback or reversal for weeks.

For more conservative investors, it’s a sign that you should be tightening up your protective stops to harvest gains and control risk.

For more aggressive investors or traders, it’s a sign that you want to hunt down the weakest companies you can find. That’s because they’ll be the first to hit the skids when the trash gets taken out.

I first named Twitter Inc. (NYSE:TWTR) in my Money Map Report 2014 Outlook last January as ripe for a fall under similar circumstances. So far that trade has returned 44.64% and counting.

Then, a few weeks ago when the Put/Call Ratio reached another extreme, I reiterated the trade for my Strike Force subscribers. So far the returns are 16.13% and 148.06% for those who shorted the stock and those who purchased put options as directed respectively.

For the social media cognoscenti, what I am suggesting is akin to heresy, but sometimes the most profitable opportunities are.

Here’s my thinking…

The Science of Shorting

Shorting a stock offers the simplest and purest way to profit from a downturn in an individual stock or the overall market. However, it’s an aggressive investing tool that isn’t for everybody.

When you sell a stock short, you borrow the shares from your broker, sell them at the current price, and hope to score a profit by buying them back again at an even lower price once the stock falls. At that point, you return the shares to your broker, keeping the difference as profit (minus a small margin fee.)

It’s a powerful short-term strategy – but it should never be used solely because a stock is overvalued. Only short a stock when you have a compelling reason to believe it’s headed toward failure – or at the very least a sharply lower valuation.

Reason #1 – Sagging User Growth

It’s no secret I don’t like social media stocks.

There’s a clear difference between products that consumers use because they pay for them and those they don’t. Further, there’s a huge disconnect between trillion-dollar trends producing real earnings for real companies  like those WE prefer and profitless companies that come to market based solely on their plans to make profits that hype-driven speculators prefer.

Even so, it surprised a lot of people on January 6, 2014, when I said it was time to short Twitter. At the time, the stock was up 86% in the prior month, fresh off its November 2013 IPO.

My reasoning was very simple. The company’s user base growth was increasing but at a radically slower rate. That suggested to me that the numbers were going in the wrong direction.

Now, nearly a year later, you can see the trend even more clearly than you could then.


Never forget, real businesses with real growth show numbers going in the same direction – up.

Reason #2 – Twitter Can’t Make Money Off The Users It Has

Social media investing Rule 101 says that the number of eyeballs is directly correlated to higher advertising revenue. But in Twitter’s case, that’s simply not happening.

It’s not for a lack of trying, though. The company has been on a tear buying anything and everything geared towards “monetizing” users.

For example, Twitter acquired MoPub, a mobile-focused ad exchange, hoping to boost the sale and purchase of ad space on its platform. The purchase cost $350 million – a serious expenditure for a company that had yet to turn out any sort of profit on its own.

This was followed by a $230 million mobile ad deal with Omnicom, in which it integrated Omnicon’s programmatic ad-buying unit called Accuen with Twitter’s newly-acquired MoPub. Supposedly, the ad deal would give Twitter a much more secure foothold in the world of mobile advertising.

Good luck. No matter what fancy Silicon Valley terminology you want to put on it, the company is like a gigantic used car lot in that they’ve got to convert tire kickers into buyers or they go out of business.

That’s not happening, either. In fact, Twitter’s “engagement” growth is declining, too.


Real businesses have increasing engagement numbers because customers find the products on offer worth paying for.

To that end, Twitter reminds me of RadioShack Corp. (NYSE:RSH).

That may surprise you because RadioShack is not a social media company. But, that’s precisely my point.

During the 1980s the company was the pinnacle of what “could be” and had a large customer following based on potential it squandered. Forced to flail wildly for an identity, the company spent money like water while moving from one set of unmet objectives to the next – none of which worked and all of which alienated consumers who didn’t care and who ultimately found better alternatives.

RadioShack, incidentally, trades at $0.50 today and is shadow of itself at the $76.63 per share peak it hit in November 1999. The trajectories sure as similar (RadioShack pictured left, Twitter on the right).

Reason #3 – Management Is Cashing Out

Normally, a growing company not only has legions of rabid fans, but management that is totally onboard, too.

But CEO Dick Costolo sold half his family trust’s TWTR holdings in early November for a quick $11.6 million score. Ordinarily, this wouldn’t concern me too much because corporate officers can have liquidity events just like anybody else can – selling a house, paying for college, funding a divorce, caring for a sick parent and more.

In this case, though, Costolo sold after Twitter stock had already slumped following the dismal Q3 2014 earnings report in late October. That’s not the move of a confident CEO who would be buying because he saw value in depressed prices.

So how far can Twitter fall?

Nobody knows for sure. I believe the company is worth $11.19 a share based on calculations including current revenue and borrowing Google’s price to sales figure of 5.25 instead of the ridiculous 16.67 Twitter currently enjoys as a comp – just to be generous.

And that means shorting Twitter or buying put options that bet on a price decline may be far more profitable than betting on a recovery.

Just make sure you’ve got your upside covered and risk management under control. And I’ll be back to talk about both of those things in an upcoming column as we head into 2015 together.

I think it’s going to be a great year.

I’m thrilled you’re here.

Best regards,

Keith

30 Responses to The Only Social Media Play I’m Recommending Right Now

  1. Noel M. Soria says:

    Keith: My question is related to the pervious article that the US Dollar lost 95-percent of its value. On the other hand, the dollar index is on its high and kept rising. How can you reconcile this US dollar scenario? Thanks, -Noel

    • Keith says:

      HI Noel.

      Superb question and one I am thrilled to see you ask because it means you are really taking the big picture perspective we talk about so frequently to heart.

      Here’s the thing. While fiat currencies were originally intended to be traded against each other in a constant give and take resembling a bi-lateral relationship, today there’s a 3rd wrinkle – relative value. So not only are baskets of currencies traded against each other, but they are judged by traders with regard to how they fit in the overall picture. Derivatives are a big part of this.

      Right now the US Dollar is the best looking horse in the glue factory which is why it continues to strengthen even though it is implicitly losing value. What’s interesting is that the Chinese are brilliantly holding the Yuan out of traditional currency pairs which means it does not have this challenge, something Washington does not understand.

      Best regards and thanks for being part of the Family, Keith 🙂

      • Noel M. Soria says:

        Thanks Keith.
        As a follow up to the above scenario, therefore when derivatives traders dried down to very minimal that’s the time when the U.S. Dollar feel the pinch that its value is only 5%. But there will always be derivative traders, meaning, the dollar value is not even change from 100%. Am I making sense? Thanks again, -Noel

    • BRENT says:

      The Dollar index (DXY) is a number that compares the dollars value to several of the other major world currencies.

      It’s possible for the Dollar to gain in value relative to the other currencies, but simultaneously have all the currencies loosing value. IE: The easiest way to understand this situation is that all the currencies are going down in absolute value, but the Dollar is just going down slower.

      • BRENT says:

        Doh…just delete that

        • Noel M. Soria says:

          Brent: No problem coz’ this is a process to learn things we don’t understand. Keith is right that the purchasing power of the dollar decreased 95%. I came to Saipan when gas is $0.98 per gallon, today it’s $4.20 per gallon over there. That’s an obvious decline in purchasing power, isn’t it?

          The 2nd part is what I followed up with Keith, the dollar index (DXY) is very strong compared to other baskets of currencies despite declining 95% of it’s value.

          I hope we’ll find soon what’s Keith say. Thanks, -Noel

          • Keith says:

            Hi guys.

            You are both on the right track. In the old days currencies used to be a closed loop system so a weakening of one led to a strengthening of the other. Now, however, it’s more like pushing on a rope because there is always “excess” in the system.

            Best regards and thanks for being part of the Family, Keith 🙂

  2. H. Craig Bradley says:

    FACEBOOK: ” BUYING AND TRYING”

    Keith, do you still view Facebook as high long term risk do to its valuation (PE Ratio) and uncertain future revenue growth. Your investment theme stresses needs rather than discretionary items or products. Seems the whole Social Media space is all about discretionary time and money. I don’t use it and don’t own any now.

    FB a pricy stock with relatively tiny EPS for a multi-billion dollar company. Can CEO Mark Zuckerman keep “buying and trying” and eventually hit the bulls-eye or are investors simply hoping for too much instead of (value) investing. Today’s lofty market valuations seem to favor the largest companies; the most well know names in all sectors and has been indiscriminately rewarding many of the bad ones as well as the best (financially strongest) ones largely on that basis. I take it as ” The (Market) Ho’s Get the Mo’s”.

  3. Keith says:

    Hello Craig.

    That’s an extremely insightful question. In a word, yes. The buy and try methods associated with most social media stocks make them great speculative vehicles but terrible investments.

    Social media stocks have in my opinion very much become a winner take all proposition. CEO’s and venture capitalist know this which is why the saying amongst private financiers is as crass as it is insightful – “you only have to be right once” (to make a billion). Running a profitable business and shareholder wealth are secondary and tertiary inputs at best.

    The next best thing is literally a click away.

    Best regards and thanks for being part of the Family, Keith 🙂

  4. Lee Lester says:

    Hey Keith! Its funny how not a few minutes from me getting this email from you, Kramer comes out and says Twitter is a buy. He thinks it is a deal because new management or a takeover bid could make it go up.

    I am not saying that he is right. Its just funny to watch who says what and why and what actually happens.

    Personally, on this one, I agree with you…everything suggests short it!

    Thanks for the info Keith!

    – Lee

    • Noel M. Soria says:

      Lee: What I knew is that Jim Kramer is a great marketer! If you read Twitter’s financial reports, there are more negatives and abnormal balance ratings than a normal financial yardstick out there. Let’s hear Keith’s reply to you which I like to know too! Thanks, -Noel

    • Keith says:

      Hello Lee and thanks for the kind words.

      No doubt Cramer is on to something but I think the numbers are the more compelling factor here. Unless new management can do something to change the USER experience, that’s going to continue to drop off.

      Best regards and thanks for being part of the Family, Keith 🙂

  5. Joe Lau says:

    Hi Keith,

    Brilliant take on a money-losing “high-flyer” and an awe-inspiring trade idea too.

    This is Joe from Hong Kong. You mentioned the Chinese yuan while offering your views on why the US dollar, a perennially debased currency, is currently powering ahead like a train. I found it interesting yet a bit lost when you said the Chinese are brilliantly holding the yuan out of traditional currency pairs, something Washington doesn’t understand.

    Did you mean the yuan remains essentially tied to the dollar despite the fact that it has ostensibly been made to track a basket of currencies for almost a decade now?

    There have been a number of steps taken during that period with a view to allowing more flexibility regarding the exchange rates of the yuan. It can now move a maximum 2% up and down from the official rate set each morning by the People’s Bank of China.

    Speculation about whether the Chinese will be forced to join the “currency war” in the face of a rapidly depreciating yen is rampant. All that has arisen from the very fact you mentioned: the greenback is at the moment the best looking horse in the glue factory. As a consequence, the yuan has strengthened substantially against the yen, euro, Aussie, sterling and a string of emerging market currencies, hurting China’s competitiveness while exacerbating deflationary pressure at home.

    These things have immense implications for world markets. Glad you’ve taken a big-picture approach to investing while keeping an eye on the financial details of companies destined to fail as well as thrive. I admire advisors who are macro at heart yet skillful at identifying stock opportunities.

    Best,
    Joe

    • Keith says:

      Ni hao Joe.

      Thanks for the kind words and the insightful thoughts. Answering the questions you’ve asked is going to be beyond what I can do here but you’ve tapped into one of the biggest unstoppable trends of all – money itself.

      I’ll tackle this in an upcoming column if that’s cool.

      Best regards and thanks for being part of the Family, Keith 🙂

  6. n desai says:

    Shorting this or any stock by Buying put is obviously the safest route the question is how far out would you recommend this buy. Jan 2017 gives the maximum time but costly. Any advise?

    • Keith says:

      Hello there.

      Unfortunately, it would be in appropriate for me to answer because I am not familiar with your specifics. However, any investor looking to make this trade will need to balance the potential for a quick move in which case options give you the best bang for the buck so to speak or the longer term price erosion I think is coming in which case a straight short may be better even it requires margin to hold on to the trade.

      Thanks for being part of the Family and best regards, Keith 🙂

  7. Bill says:

    Keith good insight to buying air, I agree on the Social Payton Place or is it an old Eagle’s song After The Thrill Is Gone!
    I have a question and it almost seems like social media the way the price of oil has been leaking! I am sure there is some blood in the streets across the border and it just seems like cross N. Dakota into Canada’s Northern Lights which usually take summer for the pictures of natures beauty to strike but right now it seems like they could lite up the night with oil as the fireworks. My question is I have always had a good vision when to get some profit off the smaller or mid size players like LSTMF and a few others it was almost knowing how to read the Almanac , but now with the USA or should or can I say Obama and Buffet’s Train putting it to Canada in my book 6 yrs. of throwing our Great Allie under the bus when the Keystone could of would of had some cards with China now they will be lucky to give it away which really changes the way Canada and there petroleum business takes a huge hit because those 6 yrs have let many a player catch up to the game like Australia etc. What is going to happen to the cluster up there, there used to be several monthly dividend movers etc. now they will have a hard time to keep the lights on it seems and we more or less did it to them. Just wanted to get a gut check on your feelings of really a country rich in natural resources and we the USA really seems to me threw a wrench into there future. Will Europe go to bat for Canada and the oil or will China bury them especially when China has made huge steps into buying there resources, even China has made huge inroads in the USA REAL ESTATE like the New York City Experiment (Rockefeller, Gold Vault and much more) Give us a long term take well a couple ways China leaves a door open for us to get some direction if you can and if anything I said makes sense, there was no easy way to run that northern border by you but any suggestions would be nice to listen to because I know China can pay cash for what they want and step on it if they don’t want it so nobody else can get in there way. The YUAN IS HERE!
    YOUR THOUGHTS? PLEASE HAPPY HOLIDAYS

    • Keith says:

      Hi Bill.

      Wow! Now that is a question. Canada is a unique situation right now. I’m watching carefully but my initial research and experience suggests it’s going to do just fine. What’s unknown is how many of the players are too leveraged up and that’s something only protracted oil prices at these levels is going to answer.

      That said, it’s also going to lead to a fresh round of consolidation so I’m actually pretty excited because the strongest really do survive.

      I’ll have more shortly on this.

      Best regards and thanks for being part of the Family, Keith 🙂

  8. Ken says:

    I can’t believe that people who are supposedly connected to the economy can’t believe that the dollar has lost nearly all of its value since the Fed was established in 1913. It took Rome four centuries to active that goal, but we’re accomplishing it in one. You’ll have to admit that we have really accomplished something big. And look at China. I read that they are emulating Ancient Egypt. The Pharaohs did exactly the same thing that China is doing now. They built entire cities from scratch. No doubt that was a “make work” project, and we know where that ended. Can China be any more lucky? And don’t forget the new religion. The Christian God is gone. He has been replaced by John Maynard Keynes, who can do no wrong, and it perfect in ways that Christians never could conceive of before. He is even worshipped by the Fundamentalist Christians. Remember that Fundamentalism begins with Fun, and Keynsian economics is all about fun. The encyclopedias may inform us that he died in 1946, but his spirit still lives, and Keynsianism has become the world religion.
    The place of Satan has been taken by Franz Hayek and Ludwig von Mises, and they are absolutely the personification of evil. There is nothing more evil now than worshipping gold, the absolute worst influence in our society that should be totally banned. This view is emphasized by the fact that China is stockpiling it so aggressively. I’m surprised that all of the born-again economists have not suggested collecting all of the world’s gold, putting it into a space ship and shooting it out into space.
    Now look at the past. At this stage in past historical cycles, every large government in history, except for one, has completely collapsed economically. Ca. 1200 B.C. Ancient Egypt was conquered and the culture declined, followed by the complete disappearance of Babylon, Assyria, the Hittite and Mycenaean Greek Empires. In 476 A.D. Odoacer, the Germanic chieftain deposed Romulus Augustus in an attempt to save the empire. He failed. This was followed by the collapse of Persia, the Gupta Empire of India and a little later China and the Islamic middle east. Only the Byzantine Empire survived because Emperor Alexios Komnenos decided to follow Satan and reinstitute the 100% gold coinage.
    During the past century or so, we’ve seen the collapse of the empires of Spain, Austria, the Ottomans, Germany twice, Japan, the Soviets and the British. So we are at the end of the third cycle. What we do now. History has shown that there are two absolutely vital elements which make civilization.possible – a vibrant, productive middle class and continuing progress in science and technology, and they are highly dependent upon each other. You can’t have one without the other, because civilization is in the hands of the working class who produce all of the work and the new ideas.

    • Noel M. Soria says:

      Ken: I love reading history like what you summarized here, wow!

      I agree with the new religion, Keynesianism which all world governments are believers. The Satans were replaced by Franz Hayek and Ludwig von Mises in our time. It’s a new world too of which bright future was replaced by darkness. Thanks, -Noel

      • Keith says:

        I cannot tell you how proud I am because folks like you make Total Wealth a great place to be. The thinking, the fellowship and the sharing of ideas that’s emerging are terrific!

        And, I, too, love the history here. I’m also struck by the irony of what happens when the so-called “smartest guys in the room” haven’t got a clue!

        Just keep in mind the ultimate history lesson…from chaos comes opportunity. Usually there’s a rewriting a la industry, technology etc…In this case it’s the rule of money.

        Best regards and thanks for being part of the Family, Keith 🙂

  9. sam says:

    what is happening with ktos as it keeps on going down i bought it @6.73

    • Keith says:

      Hi Sam.

      KTOS is frustrating because it’s been hit by a classic case of external factors. In this case we’re talking about competitors protesting the bidding process and slow paying for work delivery. Absent those two things, I believe KTOS would have easily met the numbers that ostensibly caused this. I’m looking for a re-entry point as I type.

      Best regards and thanks for being part of the Family, Keith 🙂

  10. Joe Herrity says:

    Hello Keith,

    Your comments on Twitter has stirred a question I have had foe some time about many pairs of stocks who operate in the same industry; for example, Twitter and Facebook; Coca Cola and Pepsi; CVS and Walgreens, UPS and Fed Ex, etc. My questions focus on certain aspects of owning these stocks such as; 1) in paired stocks, one stock is usually a “dominator” and the other one is closely behind the leader as a competitor creating an increase playing field for stocks to push each other along toward higher gains. So instead of having one “dominator” in a field, you in essence have two dominators in a field.; 2) stocks of these nature are usually very solid stocks to invest in and own and could be foundational over a long period of time for an investor. My question is: how do you determine which of the two paired stocks is the best or better to own. Thanks.

    • Keith says:

      Hello Joe.

      I’ve actually done a lot of work on pairs trading over the years and you’re on the right track; however, it’s beyond what I can answer here so let me tackle that in an upcoming column if you don’t mind. It’s pretty exciting stuff to be sure.

      Best regards and thanks for being part of the Family, Keith 🙂

  11. John says:

    Dear Keith:

    1.Which do you prefer and why? Shorting a stock or buying put calls.
    2.Since you are recommending either, what option trade are you specifically recommending, ie, date, strike price, etc.

    Thank you

    • Keith says:

      Hello John.

      Great question. Unfortunately, the answer depends entirely on your personal risk preferences, objectives and tolerance. And that means that what may be right for you isn’t for another investor.

      I suggest starting with two thoughts – what’s your time frame and expected outcome?

      If the answer is short and a big number, that suggests put options may be the ticket. But you’ll be fighting time decay the entire time so you’ve got to have solid risk management in place.

      If you’ve got a longer time frame, shorting the stock itself can be more effective because that allows you to ride the gradual price erosion. Here though, you’ll want to ensure you’ve got enough margin on hand if the trade goes against you and strict risk management rules in place if your personal “exits” are breached.

      Thanks for being part of the Family and best regards, Keith 🙂

      PS: your question makes me think that an options primer may be helpful down the line so keep an eye peeled for just that in early 2015.

  12. Mel says:

    I also bought KTOS at $6.85.
    Now it’s almost down to $.
    what should we expect now?

    • Keith says:

      Hello Mel.

      The company is still very compelling to me. Small defense contractors have an interesting niche and the bidding process which is clearly geared to larger competitors simply requires some inertia to break through – which is exactly what I think the company will do in 2015.

      I’m actually working on a detailed update right now so stay tuned.

      Best regards and thanks for being part of the Family, Keith 🙂

  13. Thanks for sharing your info. I really appreciate your efforts
    and I will be waiting for your next post thanks once again.

Leave a Reply

Your email address will not be published. Required fields are marked *