The Day Facebook Becomes a Value Stock

Tickers in this article: EBAY FB KKD
NEW YORK ( TheStreet) -- As a value investor, there are a plethora of companies that I will probably never own. High-growth companies with high expectations, and cult-like followings are unlikely to ever end up in my portfolio. Unless, of course, they become cheap enough.

Typically, when this happens, the growth crowd has already given up and fled the scene. In that regard, there's sometimes a fine line between growth and value. Sometimes the growth players give up, and the value crowd moves in. In a sense, it's a "circle of life" of sorts in the investment world.

I certainly don't see that happening anytime soon with Facebook(FB) . I've been asked by many why I was so critical of Facebook in the weeks leading up to the IPO. The truth is, I have nothing against Facebook . I use it and although the novelty has worn off for me, it is still a phenomenon for many. It wasn't the company per se that I had an issue with, it was the valuation. It just did not make sense that the company could be worth $100 billion, which is 100 times earnings, and more than 30 times revenue, right out of the chute. This is a cult stock, and investors are often willing to pay a premium for those, whether or not it makes sense. I still don't like Facebook at $31, which is 50 times 2013 consensus earnings estimates, and about 10 times revenue. I doubt I'd be a buyer at $21, or $15. But that's just me. (That's not to say that no one will make any money on Facebook; that's a separate issue.)

I will, however, look at former high-flyers when the growth crowd finally throws in the towel. That's partially what happened to eBay(EBAY) in early 2009; of course that was also an extraordinary time in the markets, and many names were simply being thrown away. In eBay's case, the beating was brutal and mostly undeserved. Shares briefly dipped below $10 in early March 2009, which implied a price-to-earnings ratio of less than 6. That was remarkable for a company with net profit margins in the high 20s, nearly $5 billion, or just under $4 per share, in cash and marketable securities, and no debt on the balance sheet. EBay, a high-growth, cult stock I thought I'd never own, became too cheap not to own.

Taking a position in eBay may have seemed like a big step for a value investor, someone who is a follower of Ben Graham. But the valuations were compelling, and eBay had made the leap into the world of value. It was a profitable position too, as the stock more than tripled in less than two years. When I finally felt as though eBay had run its course, I closed the position. It has since run higher. EBay is still not very expensive, trading at about 16 times 2013 consensus earnings estimates, and is still highly profitable (27.7% net profit margins for 2011), but it's not the screaming value play it was a few years ago.