These days, any time a big-name company (most often a “hot tech stock”) files its initial registration to become a publicly traded company, I field inquiries from friends, family and readers on what my thoughts are regarding said company — even though I already know that the majority of these folks have already made up their minds and will likely ignore my advice…

That’s because what I tell them isn’t what they want to hear. So they’ll disregard and seek opinions that match their own. This is called confirmation bias.

This scenario played out when popular social-media company Snapchat (NYSE: SNAP) went public March 2. For the uninitiated, Snapchat is basically a platform that allows you to use the camera on your phone to send pictures or short videos (aka “snaps”) to your friends or the public at large, along with a host of animations and effects that allow the user to enhance their image or story. Then, once a friend views the snap, it will disappear. (For more information, ask a kid.)

The video-messaging app raised $3.4 billion in its initial public offering (IPO), making it the biggest social-media IPO since Twitter (NYSE: TWTR) went public in early 2014. The firm sold 200 million shares at $17 each, giving the company a market value of about $20 billion. On its first full day of trading, shares shot above $24 — a 40%-plus increase from its IPO price — pushing its valuation to more than $30 billion. But the share price hasn’t fared well since:

Many investors believe Snap could be the next big social-media success. And it could very well be. But here’s the thing about investing in IPOs… it’s a fool’s game.

In September 2014, I wrote at length about the perils of investing in IPOs. At the time, I was talking about China’s e-commerce giant Alibaba (Nasdaq: BABA), but what I said very well refers to any IPO.

#-ad_banner-#One of the reasons it’s a fool’s game is because many early investors can’t sell all of their shares on the first day of trading, or the second or even the third day. That’s because their shares are usually what are called restricted stock units (RSUs) that limit when they can sell the stock. The vesting period for RSUs can range anywhere from three months to 12 months from the offering date. After that time period, they can begin selling their shares if they want to… and most want to.

As I mentioned in that article, institutional investors like to cash in their big profits at the little guy’s expense. It’s best to wait until the dust settles before making a decision as to whether you should invest in a new company.

That’s why investing in IPOs isn’t the mission of my premium newsletter, Top Stock Advisor. We’re looking for capital-efficient companies that will reward us over the long term, and it’ll usually take years before a recent IPO makes the list. But of course, there are always exceptions.

I am not saying Snap is an exception. According to its prospectus, the company generated revenue of over $404 million and reported a net loss of over $500 million. In other words, the company isn’t profitable yet, which is typical of a young, growing tech company. But to me that doesn’t warrant a market valuation of more than $20 billion. That means it’s trading at a price-to-sales ratio (P/S) of 63. Facebook (Nasdaq: FB), its largest competitor, by contrast, trades at a P/S ratio of only 14.

But that doesn’t mean in a few years Snap couldn’t be like Top Stock Advisor holding Facebook…

Facebook’s Impressive Growth Story
Most of the holdings in Top Stock Advisor are well-established, stodgy companies that have been rewarding shareholders for decades. (This fits with our mission of owning shares of companies you can sleep well at night with, knowing they’ll reward you over the long haul.)
 
But then there’s Facebook… a relatively young company that has slowly became one of my favorites.

Here’s why…

Over the last four years, Facebook’s revenues, margins and free cash flow have grown at an impressive clip. Last year, nearly half its sales turned into operating profit. Operating margin was 45% — a jump over 2015’s 35% and an impressive increase from 2012’s 10.6%. Despite spending over $4.4 billion in capital expenditures, the social-media giant churned out $11.6 billion in free cash flow in 2016.

What’s more, its balance sheet is impeccable.

The company has zero long-term or short-term debt. Zilch. Plus, it has more than $29 billion in cash and securities sitting in its corporate coffers. This allows Facebook to make strategic acquisitions to stay ahead of its competition — like its 2012 purchase of fellow social-media app Instagram for $1 billion. Then in 2014, it spent $22 billion to acquire messaging service WhatsApp and $2 billion for the virtual reality startup Oculus VR. Facebook has made it a priority to stay one step ahead of some of these burgeoning trends.

The company continues to add millions of users nearly every day. At the end of 2016, its monthly active users increased 17% year-over-year to 1.86 billion, with 1.23 billion daily active users on average, an increase of 18% from the prior year.

This has all led to an impressive growth story for Facebook. To think that the year before it went public — in 2011 — it had sales of $3.7 billion. Last year, sales eclipsed $27.6 billion. That’s an incredible growth of 644% over the last five years. And it doesn’t seem to be slowing down.

Again, this is rare territory for a Top Stock Advisor holding. Financials like these are usually reserved for small-cap companies, not a $400 billion behemoth like Facebook.

Facebook has quickly turned into one of my favorite stocks… but that doesn’t mean I’ll chase it higher from these levels. Just know that rather than chasing a new IPO like Snap, investors should take positions in more reliable names like Facebook.

But as great as Facebook’s performance has been, it still makes up only a small piece of a market-crushing portfolio. In fact, my Top Stock Advisor portfolio includes over twenty other holdings, many of which have provided, and are continuing to provide, even better returns than my Facebook stake.

Together, these holdings make up a portfolio that allows my subscribers and me to easily beat the market’s performance without taking on unnecessary risk. If you’d like to join us and experience these life-changing returns for yourself, you can start by clicking here.