A loss of 21.68% in 2018 for shares of Facebook, Inc. (FB) tells a story of unusual bearish trading activity accompanying the move. Over time, however, we've learned how great companies tend to overcome technical weakness and eventually regain dominance. The main criteria we look for when betting on upside in a stock under pressure are a history of strong fundamentals, oversold conditions and a slowing of big selling in the shares.

I'll go into the fundamental picture later, but the true tell on the near-term trajectory of the stock lies in its trading activity. Since August, Facebook shares have decreased in price alongside an increase in volume. This is likely due to the guidance cut the company made. Much of the fear is already priced into the shares at current levels. In terms of big potential selling in the shares, it looks like that trend is beginning to change.

For Mapsignals, when we look for an entry on a prior leading stock, we want to see a slowing of potential selling. Since August, Facebook stock has logged 14 unusually high-volume days, indicative of selling in the shares (see chart below). However, what gets our attention now is that we've seen a reverse of that activity the past couple of weeks, which suggests that demand for the stock is increasing.

In the chart below, Facebook stock has been gaining recently. The pullback of approximately 40% from highs makes this stock interesting:

Chart showing the performance of Facebook, Inc. (FB) stock

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 for a turnaround, we consider prior leaders that have fallen excessively due to fear and that show a slowing in selling:

  • Year-to-date (YTD) underperformance vs. market: -21.24% vs. SPDR S&P 500 ETF (SPY)
  • YTD outperformance vs. sector: -23.99% vs. Technology Select Sector SPDR ETF (XLK)
  • Bearish unusual trading signals are slowing

Just to show you graphically what our unusual trading activity signal looks like, have a look at all of the unusual institutional (UI) signals Facebook stock has made over the past year. Since August, it has been a one-way train of selling, which has slowed since November:

Chart showing UI signals made by Facebook, Inc. (FB) stock over the past year

Now, we take it a step further and score the best stocks showing unusual activity. Below you can see the historical times since 2016 that Facebook made buy signals for Mapsignals. These are the highest-rated signals in our stock universe. Clearly, we have been all over the massive run-up over the years:

Chart showing buy signals made by Facebook, Inc. (FB) stock over the past year

On top of a bleak technical picture that looks to be improving, 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 still showed growth:

  • Q3 2018 year-over-year (YoY) revenue growth rate: +33%
  • Q3 2018 YoY diluted EPS growth rate: +11%

Facebook is underperforming technically but has a history of great fundamentals. We believe that the current level for the shares is in position for further upside. The narrative for Facebook is very negative, but great companies tend to figure it out 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 large pullback in price, historical fundamental outperformance and a slowing of unusual distribution signals, this stock could be worth a spot in a growth-oriented portfolio.

To learn more about Mapsignals' institutional signals, please visit our "About Us" page.

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