5 Stocks to Buy Before Facebook

At this point, you've gotten quite an earful about Facebook (Nasdaq: FB  ) . But whether you're hopping mad or shaking your head at the apparent foolishness, a bull or a bear, a Mark Zuckerberg fanboy or a hater, you have to admit this: For all of its size and influence, as an investment Facebook has some serious fleas.

So if you're reading about Facebook but hoping to invest in something better, here are five companies that excel where Facebook falls short.

1. Facebook has an unproven business model
Because Facebook is online and most of its revenue comes from advertising, it's tempting to think of the business model as very similar to that of Google. However, the search-centric model of Google is different from Facebook's social-networking platform, so it'd be a mistake to automatically assume that Facebook's advertising business will be as successful as Google's. Maybe more worrisome, as technology continues to shift Facebook users to mobile devices, the company will have to grapple with a platform that hasn't been particularly lucrative for it thus far.

On the polar opposite end of the spectrum, Procter & Gamble (NYSE: PG  ) has a very well proven business model -- it develops and sells products and brands that consumers are willing to buy over and over again. Not only is that business model time tested, but so is P&G's incarnation of that business -- the company is 175 years old and owns blockbuster brands such as Gillette, Tide, and Crest.

2. Facebook's stock appears vastly overvalued
On the basis of Facebook's forward earnings -- that is, what Wall Street expects the company to earn over the next year -- the company's price-to-earnings ratio is 52. In simple terms, that means -- growth aside -- that if investors were given every cent of Facebook's profit, it would take 52 years for them to be paid back for their investment. Only after that would they be making a profit.

Just staying within the world of tech, there are plenty of investment options with lower valuations. Google's forward P/E ratio is 13, Apple's (Nasdaq: AAPL  ) is 11.8, Cisco is at 8.8, and Oracle trades at 10.2 times its expected earnings.

One of my favorites, though, is Intel (Nasdaq: INTC  ) . Its forward P/E is less than 10, and it's a business that's proved itself very successful over decades of slinging industry-leading chips.

3. Facebook doesn't pay a dividend
A stock doesn't have to pay a dividend to be worth buying, but in recent years many investors have recognized the value that comes from a quarterly cash profit payout. Since Facebook is still in high-growth mode, it's smart for it to hold onto its cash. But that's not the case for many companies -- even in the historically dividend-unfriendly tech sector.

For investors who want a company that pays them back, the mighty Apple is one place they can look. The company had been reluctant to start distributing its massive cash hoard to investors, but it finally cracked earlier this year and announced that it will finally start paying its shareholders. It won't be a huge dividend -- yields from companies the likes of Intel and Microsoft are higher -- but Apple should have a lot of room to grow that payout in the future.

4. Facebook is overhyped
The time to buy a stock is either when everyone is (mistakenly) pessimistic about the company or they're just plain ignoring it. The worst time to buy? When everyone is hyped up about the stock and can't stop talking about it. Even though Facebook's stock has fallen precipitously since the IPO, it still falls in the latter category.

Table Facebook, at least for now, and check out some ignored or beaten-down stocks. One such idea is Advance Auto Parts, the $5 billion auto-parts retailer. The company has a great track record, but the stock got pummeled recently because of a lackluster forecast for this year.

5. Facebook's top brass is questionable
I applaud Zuckerberg -- he's done an outstanding job creating a huge business and making himself insanely wealthy. But do I want to invest in a company run by a 28-year-old who was reluctant to show up for the meetings for the company's IPO? I'm not so sure. Worse, do I want to own a company that thinks it's OK to endow insiders with special voting rights? Umm …

Ditch Facebook and opt for Berkshire Hathaway (NYSE: BRK-B  ) . Despite being one of the most famous investors on the planet, Warren Buffett has no problem spending a lot of time chatting with his shareholders at the company's annual meeting. And while Berkshire does have a dual-class share structure, neither of the share classes are unavailable to outside investors -- you just need deep pockets to snag those $119,845 "A" shares.

Don’t like those? Three more to try on.
Didn't find what you're looking for here? My fellow Fools have three more ideas -- each of which I'd prefer over Facebook. To check out these world-beaters, get your free copy of "3 American Companies Set to Dominate the World."

The Motley Fool owns shares of Oracle, Google, Microsoft, Berkshire Hathaway, Cisco Systems, Apple, and Facebook. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Apple, Microsoft, Procter & Gamble, Intel, and Google and creating bull call spread positions in Microsoft and Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Intel, and Microsoft but has no financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (12) | Recommend This Article (66)

Comments from our Foolish Readers

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 June 03, 2012, at 11:56 PM, SuntanIronMan wrote:

    Don't want to be THAT guy pointing out small and inconsequential mistakes... but, since you're bringing up his age as a possible reason not to invest, I guess I AM going to be THAT guy, lol:

    Zuckerberg is 28. Not 27.

  • Report this Comment On June 04, 2012, at 2:22 PM, TMFKopp wrote:

    @WhichStocksWork

    You are indeed correct, thanks for the update.

    Of course 28 vs. 27 doesn't change the point of that bullet at all :)

    Matt

  • Report this Comment On June 04, 2012, at 5:26 PM, user5701 wrote:

    Speaking of pointing out small mistakes, I sure hope Facebook doesn't have fleas!

  • Report this Comment On June 04, 2012, at 5:41 PM, mikecart1 wrote:

    5 Stocks in No Order and No Bias that are Infinitely Better than Facebook (less risk/same or more reward):

    1) Apple

    2) Any decent bank (BAC, JPM, GS, etc.)

    3) Any oil stock

    4) Any materials stock

    5) Any energy stock

    The End!

  • Report this Comment On June 04, 2012, at 5:56 PM, Darwood11 wrote:

    I agree, I'd invest in BRK-B over FB any day of the week!

  • Report this Comment On June 04, 2012, at 6:06 PM, keithlod wrote:

    Isn't this the same fools who said Intel is antiquated and that NVIDIA is on the verge of breaking Intel and AMD. Which do they recommend NVIDIA or Intel?

  • Report this Comment On June 04, 2012, at 8:36 PM, tomami wrote:

    I can think of hundreds of stocks I would rather own than facebook: I'll mention 5: Philip Morris, Coca Cola, AT&T, Kimberly-Clark, & Johnson & Johnson.

  • Report this Comment On June 04, 2012, at 9:37 PM, TMFKopp wrote:

    @keithlod

    "Isn't this the same fools who said Intel is antiquated and that NVIDIA is on the verge of breaking Intel and AMD."

    The short answer is "no," I haven't been saying that.

    The longer answer is that there is no single "Motley Fool position" on a given stock. So even though not all of my Foolish colleagues may agree with me on Intel, I'm a fan and -- as my disclosure makes clear -- an owner.

    Matt

  • Report this Comment On June 04, 2012, at 10:28 PM, twind2 wrote:

    I won't buy FB, but you can short the stock and make money on the downside or buy puts options. I did that on my virtual account and its a very good trade so far.

  • Report this Comment On June 05, 2012, at 9:07 AM, BradfordP wrote:

    Why buy Advanced Auto Parts when Genuine Parts (GPC) is better positioned in the same field and pays a higher dividend to boot?

  • Report this Comment On June 08, 2012, at 1:10 PM, DividendsDiva wrote:

    Anyone who buys any IPO, regardless of the company should be horsewhipped. No one ever makes money on any IPO except the company insiders.

  • Report this Comment On June 08, 2012, at 4:19 PM, 46HudsonPU wrote:

    You're right, any stock would be better. Just added to my PG stock this week, since it appears to be on the down-swing...

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