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Not All Facebook Coattail Plays Are the Same

Investors and speculators are already profiting from the Facebook IPO, even if we're still at least a couple of months away from the social networking giant's actual market debut.

What gives?

Well, buyers have been rushing into many of the publicly traded companies that are in one way or another related to Facebook. Some of the moves make sense. Most of the moves do not.

In an attempt to separate the companies that are worthy of riding Facebook's coattails from those that will be eventually shaken off, let's go over five of the related stocks that have moved the most since news broke of a Facebook filing six trading days ago.

  1/26/12 2/3/12 Gain
Zynga (Nasdaq: ZNGA  ) $9.52 $13.39 41%
Renren (NYSE: RENN  ) $4.16 $5.22 25%
Quepasa (AMEX: QPSA  ) $3.68 $4.64 26%
LinkedIn (NYSE: LNKD  ) $72.39 $80.37 11%
Firsthand Tech (Nasdaq: SVVC  ) $15.65 $27.60 76%

Source: Yahoo! Finance

Thanking their lucky Zuckerbergs
Zynga is one of the few Facebook jumpers that make sense. The runaway leader in social gaming was a marginally busted IPO before The Wall Street Journal reported that Facebook was going public before the market close on Jan. 26, trading for a little less than its IPO price of $10 back in December.

To Zynga's credit, it didn't shoot 41% higher overnight. It did move nicely higher, but its two biggest days were Thursday and Friday of last week, after Facebook's filing became public.

Many investors were surprised to find Zynga accounting for 12% of its total revenue -- and most of its non-display advertising revenue. However, resourceful analysts and investors took things one step further. They reverse-engineered Zynga's contribution to Facebook to realize that the social gaming company behind FarmVille and Words with Friends actually generated robust revenue in its fourth quarter. Zynga itself doesn't report until Valentine's Day, but Cupid found a match. It's quite possible that the shares may have moved ahead too much, but at least there was a relevant and intelligent association.

Renren and Quepasa were real head-scratchers. Renren runs China's most popular social networking website. Quepasa operates a Spanish-language social site that's actually in a state of decline. Why should either company benefit because Facebook goes public?

Renren is growing at a steady clip, but China's restrictive government is likely to tighten the clamps on chatty social sites. Quepasa experienced a 32% decline in monthly active users to its Spanish-language website in its most recent quarter. Quepasa is looking better with its recent myYearbook acquisition, but it's still an odd company to jump on Facebook's bandwagon.

LinkedIn's move isn't as pronounced as that of the other companies on this list, though its double-digit percentage gain over the past six trading days is clearly notable. LinkedIn runs a fast-growing social networking site for white-collared professionals. The corporate specialty may seem to limit its global appeal. LinkedIn will never have Facebook's 845 million users on board. However, it's a dream audience for employers and some marketers.

Facebook itself going public won't have a direct positive or negative impact on LinkedIn, but there's always the possibility of greater visibility as this country's other successful social networking website.

Finally, we have Firsthand Technology Value Fund. The mutual fund converted into a closed-end fund last year, giving the company greater flexibility to invest in privately held tech companies without having to worry about managing shareowner redemptions or infusions of capital the way traditional fun operators do.

As of the end of September, its most recently reported net asset value was $24.76 a share. A full $73.2 million of its $87.2 million in net assets were in cash, yet the shares were trading at a sharp discount to its net asset value.

Well, that's changing. Net assets may have declined to $84 million three months later, but the fund has gone on to acquire roughly $5 million worth of Facebook shares in recent weeks. I can't see how acquiring a stake that small at today's prices merits better than a $40 million pop in market cap, but the closed-end fund was trading at a ridiculously low discount. Now it's probably ridiculously overpriced given the discounted nature of closed-end funds.

Waiting is the hardest part
Some of these short-term gains aren't sustainable. The pretenders will get weeded out.

There are actually a couple of other public companies -- GSV Capital, T. Rowe Price, and Microsoft -- with meatier stakes in Facebook than the Firsthand closed-end vehicle. We may not be talking as large a stake in percentages here, but these companies haven't soared 76% over the past six trading days. Mutual fund operator T. Rowe Price is actually trading lower despite having $408 million worth of Facebook's stock invested across 19 of its mutual funds.

Zynga is really the only coattail hopper over the past few days with a sustainable run, but that is only if it's able to deliver blowout quarterly results a week from tomorrow.

Speculators probably know this. They're getting ready to jump off themselves. This is more a cautionary note for long-term investors that may be confusing these strong moves with correlating improvements in fundamentals.

Be careful.

The next time you hop on a coattail, check the label.

Facebook has taken the world by storm, but a new report reveals three more American companies ready to dominate the world. It's a free read, so what are you waiting for? Check it out now.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of 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.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2012, at 3:51 PM, rrtzmd wrote:

    "Now it's probably ridiculously overpriced given the discounted nature of closed-end funds."????...some of the Pimco closed end BOND funds have been trading at 60-80% PREMIUMS for YEARS...maybe someone should explain to their investors the "nature" of closed end funds...

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