A gain of 27.14% in 2019 for shares of Facebook, Inc. (FB) tells a story of a stock gaining alongside a large amount of unusual trading activity. It's bullish activity because the shares are heading higher on increasing volumes, indicating that a buyer is involved. In my last post on Facebook, I discussed how institutional selling was slowing in Facebook shares. Over time, we've learned how stocks with a history of strong fundamentals tend to rise in price. Smart money managers are always looking to bet on the next outlier stocks … the best in class.

The main criteria we look for when betting on upside in a stock are a history of strong fundamentals, strong technicals and big potential buying in the shares. I'll go into the fundamental picture in a moment, but the true tell on the near-term trajectory of a stock lies in the trading activity of the shares. Simply put, it's all about supply and demand. When demand is higher than supply, the stock rises. When demand is lower than supply, stocks fall.

For the second half of 2018, Facebook stock was in a steady downtrend. Coming out of the meltdown in the market in late 2018, shares have outperformed with unusual buy signals. In our view, pullbacks = opportunities, especially pullbacks we see as mechanical in nature.

For Mapsignals, when we look for an entry in a leading stock, we want to see an increase of potential buying. Just to show you graphically what our unusual trading activity signals look like, have a look at all of the unusual institutional (UI) signals Facebook stock has made over the past year. Clearly, there was a lot of red in the back half of 2018. Facebook shares came under pressure after the company guided lower and alerted investors to a data breach. Wall Street priced in this information, and the stock reflected this by heading lower on big volumes. The message is clear – shares move based on supply and demand. What is really catching our eye now is the recent UI buying:

Chart showing the unusual institutional (UI) signals made by Facebook, Inc. (FB)

In 2019, Facebook stock has logged three unusually high-volume days, indicative of buying in the shares starting on Jan. 31, 2019 (see chart above). This points to Facebook gaining in an unusual way, which suggests that demand for the stock is increasing.

If you are going to make a bet on the direction of a stock, it is prudent to pay attention to how the shares are trading. Just like you don't want to fight the trend, you also don't want to fight a stock that shows increasing price alongside an increase in the volume traded. Someone could potentially be accumulating a position.

Mapsignals' goal is to identify tomorrow's top stocks today. We're basically looking for outlier companies with healthy fundamentals accompanied by outsized unusual institutional trading activity. By studying these data points, we can make an educated guess as to which equities institutions are trafficking in and marry this information with fundamentally sound companies. We want the odds on our side when looking for the highest-quality stocks.

When we decide on a strong candidate, we consider prior leaders that have a history of technical outperformance. When they show leadership, we see these as opportunities. The following are a few areas where Facebook stock has grabbed our attention:

  • Year-to-date (YTD) outperformance vs. market: +16.29% vs. SPDR S&P 500 ETF (SPY)
  • YTD outperformance vs. sector: +15.71% vs. Communication Services Select Sector SPDR ETF (XLC)
  • Recent bullish unusual trading signals

Now, we take it a step further and score the best stocks showing unusual trading activity. These are the outliers. Below you can see the historical times since 2013 when Facebook made the top 20 report for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we caught the big run-up over the past five years. That's exactly what our process is designed to do. We'd even venture to call this stock an outlier:

Chart showing the buy signals made by Facebook, Inc. (FB)

On top of a technical picture that is strong, one should also look under the hood to see if the fundamental picture supports a long-term investment. As you can see, Facebook's latest earnings report showed year-over-year (YoY) growth:

  • Q4 2018 YoY revenue growth rate: +30%
  • Q4 2018 YoY diluted EPS growth rate: +65%

Facebook stock is breaking out with other high-quality tech names. We believe that the current stock price is in position for further upside. The narrative for Facebook is that the company has stumbled and will rise again. We are always on the lookout for great companies showing usual trading activity in their shares. The best companies tend to trend higher over the long run. All of this points to a long-term opportunity for the stock.

The Bottom Line

Facebook stock represents a potential buying opportunity for the long-term investor. Given the lift in price, historical fundamental outperformance and recent unusual buying signals, this stock could be worth a spot in a growth-oriented portfolio.

Disclosure: The author holds no position in Facebook shares at the time of publication.

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