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Facebook and one other ‘up-and-comer’ are top social media stock picks, traders say

Are social media stocks a sound strategy in this market environment?

That’s something many on Wall Street are likely wondering as stay-at-home orders are put in place nationwide and millions of U.S. workers keep the corporate engines running from quarantine.

Facebook reported Wednesday that it has seen a spike in activity on its platform during the coronavirus outbreak but that the pandemic’s economic impact has also taken a toll on ad sales. The announcement came a day after Twitter withdrew its first-quarter outlook, citing an anticipated softening in advertiser demand.

For Matt Maley, chief market strategist at Miller Tabak, and Michael Binger, president of Gradient Investments, one stock appeared to be the best of the bunch, they told CNBC’s “Trading Nation” on Wednesday.

“On a technical basis, anyway, Facebook looks like the best of the lot,” Maley said, pointing to its stock chart.

“If you look at its 200-week moving average, it has dipped below that line,” he said. “It did the same thing back in the deep correction of 2018, but it was able to regain it rather quickly. And even though it’s seen a little bit of a deeper drop below that line this time around, it is creeping back up to that level. So, if it can break back above it, that’s going to be positive.”

Facebook’s 200-week moving average was just above $164 as of Wednesday. The stock closed at $156.21, down nearly 3%.

Facebook has also demonstrated strength in that it has performed in line with the broader market during the recent decline, Maley said. Facebook is down about 24% year to date, while the S&P 500 is down just over 23%.

“Usually, when these high flyers really see a big ramp up, when they roll over, they get absolutely clobbered. So, the fact that it’s not tells me that investors are a little bit more confident about the long-term prospects for the stock,” Maley said. “So, as we come out of this, hopefully come out of this thing somewhat soon, this stock should do quite well.”

Binger said the social media theme “couldn’t fit any better” in the current environment and predicted that it would “increase the stickiness of some of these social stocks.”

“I happen to like Facebook. It’s no surprise that their advertising is seeing a little weakness in this pretty dramatic shutdown of the economy here. I mean, most companies are going to put a pause, but, in my opinion, that’ll be temporary,” Binger said, calling the stock “cheap.”

“I think user numbers are a forward indicator of advertising that’ll come down the road,” he said. “I think advertising will come back strong and probably stronger than it was before.”

While Binger said he preferred Facebook over Twitter, one other social stock caught his eye as well.

“It’s the up-and-comer in the social space, and I think that’s Snap,” he said. “I see a lot of people are new users to Snap. Their revenue growth is much higher than the bigger social stocks. They are inflecting to profitability right now, and I think their user engagement is going to go up a lot with all these kids that are staying home and college students that aren’t going to college anymore for the rest of this school year.”

In short, “I think Snap is the one to really own here,” Binger said. “So, in the large-cap space, love Facebook, good balance sheet, but I really think you can make some money on Snap. I think that the stock has been punished more than what the fundamentals are going to reflect.”

Investors shouldn’t try to play the space by buying Global X’s Social Media ETF (SOCL), however, the two agreed. The fund, which climbed by over 1% on Wednesday, has its biggest weightings in the stocks of Tencent, Facebook and South Korean social media platform Naver.

“People obviously like to try the ETFs nowadays. The social media ETF is a pretty illiquid one, and it has nothing to do with what’s going on with the health-care crisis right now,” Maley said. “It was illiquid before, and it only trades about 16,000 shares a day, so, … once it gathers more steam someday, it may be a better one to play, but right now, you’re going to want to stay away from that.”

Snap shares gained over 2% in Wednesday’s trading session. Twitter’s stock climbed by less than half of 1%.

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