This Stock May Finally Live Up to the Hype and Return Double-Digits

Jim Woods's picture

Monday, January 14, 2013 - 12:00am

by Jim Woods

In the 1980s, there was a famous rap music anthem titled, "Don't Believe the Hype." Well, I borrowed that admonition frequently last year when the overblown hype over the Facebook (Nasdaq: FB) IPO reached a fever pitch. Nearly every retail investor I knew wanted to own Facebook stock, and it became a symbol of the groupthink mentality that's so often infects Wall Street and Main Street.

The hype got so bad, that in May 2012, I actually had a friend ask me if they should borrow money on his home so that he could buy Facebook shares. Sadly, many people (thankfully not my friend) recklessly scrambled to buy Facebook shares immediately following the stock's public debut, and many of those investors are still sitting on a losing position.

I won't go into the epic fails on the part of Wall Street over the pricing of Facebook shares, nor will I get into the details of Facebook's hand in the mispricing affair. From a trading standpoint, these flubs are ancient history. Today, smart traders would be remiss in ignoring the recent buying momentum and potential upside catalysts that could drive Facebook significantly higher in the next several months.

Since the beginning of 2013, Facebook shares have spiked more than 11%, and they were up 5.26% in Wednesday trade alone. More importantly, the stock has now breached the psychologically significant $30 level. This is the first time the shares have been in the $30s since embarking on their major sell-off in July.

The buying in Facebook Wednesday was prompted by an invitation -- and I mean that literally.

On Wednesday morning, Facebook sent out invitations to industry watchers and the tech and financial press to an open house of sorts. The event will be held on Jan. 15, at 10 a.m., at Facebook's Menlo Park, Calif., headquarters.

Anticipation has been running high over just what is likely to be unveiled at this event. Surely, founder and CEO Mark Zuckerberg wouldn't invite the press over to kick the Facebook tires without having something new reveal. Most pundits, including me, think Mr. Zuckerberg is much smarter than that.

Now the speculation is on as to just what the famous billionaire has up his unkempt hoody's sleeve.

One theory is that Facebook is going to venture into the hardware business, possibly with a smartphone of some sort. I don't think this is too likely, as even Zuckerberg has distanced himself from the idea. Then there is the speculation about some type of tablet PC designed specifically with Facebook's social networking software in mind. Again, this is a long shot, at least in my view.

What is much more likely to come out of Facebook presser is some type of new partnership or acquisition, which builds on the company's prodigious social networking base. Some have suggested that Facebook could enter into a deal with Twitter. Others have speculated that Facebook will make a move to enter the music delivery business like a Pandora Media (NYSE: P), or even the movie industry like a Netflix (Nasdaq: NFLX).

We'll find out precisely what's unveiled soon, but one thing is for sure this week: Facebook has succeeded in unveiling a whole lot of buzz surrounding the company's next move -- and that's been great for traders betting on the long side.

I suspect that if there is an announcement soon that's viewed as a positive, both by the tech press and the financial press, then we could see Facebook shares surge to $35 in the next 8 to 12 weeks. That's more than 14% upside from current levels -- and that's certainly a reason for traders to, as they say, "Like" Facebook shares.

Action to Take --> Buy FB at the market price. Set stop-loss at $27.90. Set initial price target at $35 for a potential 14% gain in three months.

This article originally appeared on ProfitableTrading.com:
Facebook May Finally Live Up to the Hype and Return Double-Digits

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.