Is History LinkedIn's Destiny?
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2008, I was still a rookie investor. I had a couple small holdings in my infant portfolio. Of my holdings, Bank of America (NYSE: BAC) was the largest percentage. I was in for the dividend. Bank of America had one of the most consistent dividend track records around. I also figured that the country’s largest bank wouldn’t be going anywhere and would just continue delivering the dividend from now until kingdom come, and that I would just keep reinvesting those and watching my stake grow. I was caught off guard as I watched around 40$/share turn into just below $3/share in a matter of weeks.
I may not be the sharpest pencil when it comes to picking stocks. But I do have a couple tricks up my sleeve and one thing I can share comes not from Wall Street, but from Mr. K’s classroom in high school: History repeats itself.
If you can keep that one simple truth in mind, then I congratulate you. Four years later as an investor I’ve gotten a little more creative. I trade options and stocks now. While I don’t believe in necessarily timing the market, I do believe that history repeats and I do believe in market triggers. There were specific triggers in 2008. I saw those same triggers in place last October. Investors were getting the jitters. Congress was playing chicken with default. I could see the thunder clouds in the distance signaling the coming storm. Long story short, this time when Bank of America made a big drop, I made the same amount of money that I lost in 2008 by buying a short put option.
Ok, so here’s today's history lesson. Netflix, Green Mountain Coffee Roasters, and recently Chipotle Mexican Grill have very similar stories. All 3 market darlings, all were up over 300% in a 20 month time period, all growth stocks, and all with a high P/E ratio. Sometimes we call this “priced to perfection.” The problem with being priced to perfection is as soon as things are no longer perfect, shares take a tumble. The first non-perfect news triggered big losses (or gains if you had bought put options).
We are not questioning whether or not history will repeat itself, just when and where. May I submit a candidate? LinkedIn Corporation (NYSE: LNKD). This stock certainly deserves scrutiny. It’s up over 100% since its IPO not quite a year ago. It’s a very high growth stock. It’s (currently) a market darling among social networking sites since it’s about the only profitable one so far. But there is the issue of earnings per share. Latest quarter was only $0.05/share. Not very exciting for a stock trading north of $100.
If history repeated itself the exact same way with LinkedIn, then we should be expecting up to another year of growth before the big drop. I would be inclined to believe that investors will be patient with this stock for at least that much longer. But there are two factors that change this scenario a little. The first factor is that LinkedIn has a higher P/E ratio than Chipotle or Netflix ever dreamed of having. Secondly, there is a lot of pessimism right now in the market towards social networking sites. The whole sector is being drug down with poor performances from companies like Zynga (NASDAQ: ZNGA) and Facebook. Although some may disagree with me, I believe pessimism and optimism are two of the biggest moving factors on Wall Street today.
LinkedIn, in short, is going to have a big fall. When this company finally gets some bad news (and it will come…it always comes) the sell-off I estimate will be at least 25%. I would estimate this big drop to come in the first quarter of 2013, but it could happen anytime. The timing right now is definitely right with Facebook recently disappointing and Chipotle's recent sell-off. Please don’t misunderstand what I’m saying. I think that Netflix, Chipotle, and LinkedIn are fantastic businesses. What I am saying is the bar is being set too high for them, and as soon as they don’t clear the bar, the stock falls. LinkedIn’s time may come soon. But this fall won’t be a Humpty Dumpty scenario. They still have a bright future ahead of them. As soon as the stock comes down to earth a little (ok, a lot…) it will make a great long term investment.
thequast loves picking winners, but doesn't have a perfect track record. He owns shares of Bank of America. The Motley Fool owns shares of Bank of America and LinkedIn. Motley Fool newsletter services recommend LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.