Facebook: Overhyped, overpriced, and you may own it

So who’s buying Facebook shares as the insiders sell? A lot of shares go to mutual funds and pension plans, which means they may be in your portfolio already.

By The Fiscal Times May 18, 2012 2:22PM

By Merrill Goozner The Fiscal Times

Everybody is ogling the fortunes being made from the investors and owners cashing out at Facebook (FB) -- Mark Zuckerberg taking $1.1 billion, Goldman Sachs (GS) taking out nearly the same, and Peter Thiel of PayPal collecting nearly $600 million.

Their good fortune raises an obvious question. Who’s buying? Who is plunking down the estimated $6.5 billion for the 180 million public shares that hit the market today? (The rest of the 421 million publicly registered shares will be conversions from the private stock held by insiders, venture capital firms and institutional investors -- the private parties who owned Facebook before the initial public offering.)

If you are looking to join huddled masses yearning to enrich the real friends of Facebook, there’s no need to make a frenzied call to your broker. You probably already own shares. And whether you want to or not, you are about to own a lot more.

Despite all the hype about retail investors clamoring to climb on the Facebook bandwagon (which no shortages of analysts think will never generate sufficient earnings to justify its $38 initial purchase price), the vast majority of new Facebook stock will be purchased by institutional investors. These are the folks that manage the pension plans and mutual funds that hold the tax-exempt money average Americans take out of their paychecks each month for retirement savings.


70% of all big-cap stocks

Institutional investors own over half of all U.S. equities and approximately 70% of all large-cap stocks, whose ranks Facebook is joining. They are the primary clients of the lead investments bank in the deal -- Morgan Stanley, Goldman Sachs and JPMorgan Chase -- and will have first dibs on their share allocations.

Many fund managers will buy Facebook shares because they manage index funds, exchange-traded funds that track technology stocks and large-cap technology funds. They need the shares to remain properly weighted within the sector.

Mutual funds that specialize in “growth” will also seek out a Facebook play, fearing they will miss out on the next Google (conveniently forgetting it could also turn into the next Groupon (GRPN), which sold at mid-day Thursday at $12.45 a share, down from its IPO price of $20 last November).

But will funds sell, too?

Of course, a lot of mutual funds have already made a ton of money off Facebook. Many purchased shares from insiders in the private placement market that preceded Friday’s public offering. More than 30 Fidelity mutual funds currently own stock in the company. And while it is just 0.1 percent of Fidelity’s $84 billion portfolio, that is still $84 million spread among its investors.

T. Rowe Price has confirmed that 19 of its funds own private Facebook shares. A single Morgan Stanley fund, its $1.7 billion Focus Growth fund (AMOAX), holds 3.6% of its portfolio in private Facebook shares, according to the Associated Press.

Will those big mutual funds begin dumping shares like Zuckerberg, Goldman Sachs and Thiel once all its shares, both the newly minted ones and those held by insiders, are eligible for sale on the secondary stock market? They must wait 90 days before selling.

They’re not talking, of course, and individual mutual fund investors can’t learn what the managers of the funds they own are doing until quarterly statements come out. That can be as long as four or five months after the actual trades take place.

But there are preliminary indications that once the initial frenzy wears off, interest in the secondary market may not be very strong. The shares will initially sell at nearly 100 times present earnings and 50 times next year’s projected earnings. The historic average for stocks is around 15 to 20 times earnings.

A survey conducted in early April by Investment News, a trade newsletter for financial advisers, found that 76 percent of investment professionals will not be recommending the stock to their retail clients. Yet more than half of those same advisers thought Facebook would outperform Google, which has gained more than 600 percent since its IPO in 2004.

It’s worth noting that most mutual funds and investment advisers perform on average slightly worse than a simple investment in an S&P 500 index fund. That index, should you choose to buy it, will soon include Facebook and funds that track the index will be among those purchasing the company’s shares tomorrow and in the months ahead.

More from The Fiscal Times:

May 18, 2012 3:58PM
I'm laughing my butt off all day at this horrible start on Facebooks IPO ........ dummies overhyped it and then put waaaaaay too many shares out ....... Morgan Stanley and others have been manipulating the results all day making sure the $38 per share wouldnt go less than that ...... lol, how long are they going to do this ..... lol
May 18, 2012 5:39PM
I still hope they all go broke.... Boycott F***book
When will FACEBOOK start charging to use it...you know it's coming....??????
May 18, 2012 5:21PM
I will be in touch with my financial planner to ask if any of the institutional funds I'm in hold it.  Any portfolio it is in I will tell him to sell.
May 18, 2012 5:22PM
Suckers......you're all be manipulated and probably don't even see it, let alone want to believe it......enough said
May 18, 2012 7:38PM
I am starting a website for social cookers to exchange recipes and share ideas. I am going to call it FaceCook. I can see the millons of suckers... er I mean dollars right now!
May 18, 2012 4:00PM

Very good article. I was thinking along these same lines this morning. Most of what's going on in an IPO on the scale of Facebook is just an introduction of a new stock and reallocation of wealth within the stocks already in the S&P 500. In other words, it's just happening because Wall Street said so, and because they and the insiders of the company can make a bunch of money off the process. It has little to do with real investor demand for Facebook stock. From the user comments I've read, it has nothing to do with satisfaction and value proposition for them.


I'm so happy for all those who managed to top tic the market and buy at $45 today, now that Facebook is set to close within pennies of it's $38 IPO price. Mark Zuckerber absolutely adores you. 

May 18, 2012 9:49PM
IPO = Idiots Paid Out $$$,$$$,$$$ to make some fools richer in the hopes they will get 0.$$$ in return all the while those who got the money can brag how much they suckered bewildered and confused hard working people into thinking they to might profit a % in some way.. To find out way down the road all they really did was go WayUpInya adn now you got less than you started and there is No-Refunds...  
May 18, 2012 10:28PM

Facebook lacks one critcal ingrediant- MARKETING EXPERTISE. Google learned how to target customers , generating a ton of revenue for both them and their advertisers. Facebook , who has already lost General Motors as an advertiser, uses an intrusive, shotgun approach to reach buyers.

Google is interactive and will target their ads to someone with a likelihood to buy (they already expressed an interest)Google also shares  relavant data  about  buyers/potential buyers  with the advertiser. Facebook DOES NOT! (Despite the fact that  this information    is readily accesible, it is not shared with advertisers-a critical missing link in Facebooks quest  in building a solid advertiser roster. Facebook needs ad revenue to survive and grow, but as of yet have  not shown they have the expertise to compete with the likes of

Google or Yahoo.

May 19, 2012 12:02AM
Too Late To Buy!  The Money Has Been Made!
May 19, 2012 7:50PM
Mutual funds bailed everybody else out. With YOUR money.
May 18, 2012 9:49PM

Bill evans Bill Jones smill smones

May 18, 2012 9:33PM
You know a good ploy would be to try and scare people away from Facebook so you can  get the stock  I think most of you are jealous IDIOT's; and I would buy that stock. There's so much more that facebook will do; why would you play your hand now? Don't you think he's thought of all this. He will reap more than the BS  you can talk.. Of nothing will stop your mouth's from doing that oh yes I take stock in that toooooo. 
May 18, 2012 4:30PM
Bull flatulence! I don't own any of that liquid manure. I'm with TD Ameritrade. They're not part of the buttfacebook underwriting syndicate.
May 18, 2012 5:34PM

This is no mistake, yes I think in time it will show that this stock is a winner.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.





Quotes delayed at least 15 min