Facebook and the Cautious Investor

Break out the balloons and ticker tape! On May 24, 2012, I recommended buying Facebook (NASDAQ: FB  ) , and yesterday was the first time since June last year that your purchase would have turned a profit. Actually, there's almost no way you would have made a profit, assuming that you pay any sort of transaction fees. The stock was up just 1.5% over the period, and that's not going to get anyone set up for retirement. But I do feel a certain sense of pride for having made the call. But even though it's "up," was there anything to my claim?

Why Facebook?
Back then, I had two main reasons for recommending Facebook. First, it had a huge -- and growing -- user base. Second, it had untapped revenue potential through its payment platform. Those two points still hold true, and I'm adding a third reason. Facebook is finally figuring out how to make its oceans of data usable, which in turn makes them monetizable. This was most recently evident in the release of company's new Graph Search tool. Ostensibly the tool is supposed to help you find people with common interests that will allow you to make new friends -- how sweet.

Really, the graph tool is a marketer's dream come true. Before, the system saw you as a 45-year-old male who had "liked" 600 random pages. Maybe your friend told you about that one band, maybe your cousin's new business needed some more likes, maybe you actually like Joe's Pizza -- in the eyes of the algorithm, it's all the same. Now those days are over. You keep looking for friends who live in Houston and really like bikes. Facebook is going to be able to target its ads with even more focus, which means that they can charge companies even more for the ads.

This is still early days for Facebook's big-data usage, though. Google (NASDAQ: GOOGL  ) is the undisputed king of big online data, and Facebook has a long way to go before it figures out the whole puzzle. But there are treasures to be found, for sure. Think of Google's ad targeting, or its promotion of companies that pay a bit more, or its forays into payments -- all of those can be in Facebook's future.

Why not Facebook?
So that's the tiny dance that's happening in my mind. Here's the other side of that coin: Time is money. If you're just breaking even on your Facebook shares now, you start to wonder what you could have had instead? Unfortunately, Facebook wasn't your best bet over that period. Even simple picks like Google or either of the two companies that I was pulling hard for last year, Buckle and Gap, would have given you a better return.

Does that mean that those were better investments? I think so. It's an odd calculus, to be sure, but even though I stand by my recommendation for Facebook, it's not the best of the advice I gave. I knew that there would be ups and downs before the stock really paid off, which meant that there was a chance you'd buy on the high point, rather than the low. I knew that Gap and Buckle (especially the latter) were fundamentally more solid than Facebook. Those companies were both bringing in solid comparable sales growth, and consistently paid out a dividend. Google was, and still is, all by itself in a category. It's hard not to recommend a company that is so distinguished from its peers that it doesn't have peers.

The bottom line
In short, I'd recommend Facebook again and I'm happy that it's done what it's done over the last nine months, but it remains a risky stock. There are a lot of expectations that smaller or more stable companies never have to deal with. One little setback will drop the share price like a stone, and tomorrow may be one of those moments. On the other hand, on Wednesday I might look like a prophet, if payment processing fees are up and the company beats earnings expectations.

Regardless of what happens, Facebook is still a good company, and I still recommend it. But now I'll do so with a caveat: Remember that to buy Facebook, you have to not buy something else, and there are a lot of very good stocks out there.

If you've gotten this far and you're still considering Facebook, then you should get the inside scoop on the things every investor needs to know about the company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.

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