- The Washington Times - Wednesday, February 29, 2012

Facebook’s stock is likely to provide early buyers with a hard lesson about how investing isn’t friending.

Analysts warn that Facebook may be the biggest “nosebleed” investment in recent memory, but fear that the too-high price won’t stop investors from buying with their hearts instead of their heads when Facebook becomes a publicly traded company, as expected this spring.

“Your emotions are your biggest enemy as an investor,” said Paul McWilliams, editor of the New Jersey-based Next Inning Technology Research. “They just get carried away sometimes.”

In Facebook, potential investors are faced with an even more hyped name-brand property than such other recent social-media stocks as LinkedIn and Groupon, the prices for which went through the roof and far beyond the companies’ long-term worth.

LinkedIn set its initial public offering (IPO) price at $45 a share, but the excitement surrounding it meant that the stock began public trading on May 19, 2011, at $83 and rushed up to $122 during the first day of trading. Shortly thereafter, LinkedIn shares plunged to about $65 each and is now trading at $86.

Similarly, Groupon opened at $28 on Nov. 4, 2011, and jumped to $31 on the first day of trading, but is currently down to $19.

The Facebook frenzy could have an even greater effect, possibly shooting the price to more than twice what analysts say it is worth. While they expect it to open in the mid-$40s or $50 per share, it could soon jump to more than $100.

“There’s a crazy amount of demand centered around this IPO,” said Kelley Damiani, vice president of Trippon Financial Publishing in Houston. “People are jumping into it no matter what the price is. They’re getting in at these high prices.”

But that price won’t last long.

After the initial influx in the stock price, analysts expect it to settle closer to the original value of the IPO. Ms. Damiani expects a slight 10 percent to 15 percent increase from the original price that could put the stock in the mid-$60s for the following few months.

All of that means that most early investors will overpay for their Facebook shares.

“It’s really artificial demand,” Ms. Damiani said. “These investors, they know Facebook, it’s become a household name. Everyone wants shares of Facebook.”

The decline in Facebook’s stock price after the first-day buzz likely will continue because of effects of the “lockup period,” suggests a study from students at Washington University in St. Louis.

For 90 days after the stock starts trading, Facebook management cannot sell personal stock, a rule created so that investors can have confidence that the managers have Facebook’s best interest in mind.

The smaller number of shares available helps keep the initial price high. But when this lockup period expires, management often sells a large portion of stock, which increases supply and forces the price downward.

“My cut of the pie goes down,” Mr. McWilliams said.

The Washington University study, “A Persistent Anomaly,” found that tech stocks had what the scholars called a high “beta” score, meaning that they are perceived to be riskier and thus tend to lose the most value after the lockup period expires.

Facebook probably will be a high beta stock,” said Jonathan Woo, a graduate student who worked on the study, along with Sam Poteat and Borge Klungerbo. “Tech stocks generally have higher betas.”

The negative effects of the lockup are usually felt in the three to five days after the expiration, Ms. Damiani said. She suggests that the true value of the stock will begin to show itself about 60 days later, by which time investors have a chance to see the company’s earnings report and make a rational decision on whether to invest.

At this point, Ms. Damiani said, Facebook stock could drop near its original trading price in the $50s. Mr. McWilliams said it could drop even further to the $40s.

But Facebook poses another problem investors must consider - that the social network could become outdated if either Facebook users flock to another site or social networking becomes generally unpopular.

“We are afraid that it is coming to a phase where it could be another MySpace,” Ms. Damiani said. “It has a lot of contenders in the shadows.”

Not all tech stocks have folded. While social media stocks struggle because of the ever-changing nature of the industry, companies in other tech sectors are having much success.

Apple, known for popular devices like the iPhone and iPad, is distinguishing itself as the wealthiest company in the world. This week, it topped $500 billion in value, becoming one of only five companies in history to do that. It is trading at about $545 a share, up from about $10 a decade ago.

Google, which went public in 2004, opened at $85 a share, but is now trading about $620. The Internet giant is worth more than $200 billion.