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Buying Checklist 61

Facebook’s Earnings and Sales Growth at Time of 2012 IPO
Quarter Earnings Sales

Sep-11 100% 104%
Dec-11 25% 55%
Mar-12 9% 45%

So despite all the buzz and pre-IPO hype, you could have looked objec-
tively at Facebook and seen the bottom-line facts: Sales and earnings were
both heading in the wrong direction. And what happened next? From its
May debut through August, the stock dropped 50%.
Down the road, Facebook may have all the pieces of the puzzle in place,
but if you had used this Buying Checklist, you would have clearly seen
that—even prior to the IPO—the stock did not earn a passing grade. And in
the company’s first two reports after going public, Facebook reported 0%
earnings growth.
Remember: Never buy a stock just because someone recommends it or
because with all the buzz, you’re “sure” it will go up. Instead, pick stocks
based on rules: Make every stock prove itself by passing the Buying
Checklist.

■ ✔ Among the top-rated stocks in its industry group

Here’s a simple rule of thumb for successful investing: Focus on the
top-rated stocks in the top-ranked industry groups. This part of the
checklist shows if your stock fits that bill.
Stock Checkup shows the Top 5 stocks in each industry group based on
IBD SmartSelect Ratings. In general, you want to focus on the #1 or #2
stock in the group in terms of Composite Rating.
Keep in mind: “Top-rated” does not necessarily mean “best-known.”
Here’s an extreme example: Everyone knows mortgage giant Fannie
Mae, but its stock completely collapsed during the 2008 housing crisis, and
by August 2012, it had already been delisted from the Nasdaq and was trad-
ing around 25 cents a share. Yet its industry group was ranked #1 out of the
197 groups IBD tracks.
So what was the “top-rated” stock in Fannie Mae’s Finance–Mortgage &
Related Services group?