Beware - long, boorish tome.
My timing was indeed spectacular when citing Klic as a valuation example.
But the recent turn of events with that stock, and the posts by Peter and those touting GZMO, combine to make my point even more poignant.
Peter has given us a wonderful presentation of his approach to valuing biotech stocks. I could do the same for certain neuro related BTs and I could attempt a similar analysis of the Semiconductor Equipment Manufacturing (SEM) industry. IMO, there’s a fundamental flaw in all valuation attempts and the SEM stocks are displaying this with complete abandon currently.
Most folks familiar with the SEM sector agree that while there may be a brief period of slowing, the cycle (in the semi industry) is far from over. In fact, Lehman released a report a couple of hours ago entitled (sic)‘10 reasons why the semiconductor industry is healthy’. The sector continues to tank. The psychology of investors towards these stocks has changed and no amount of compelling logic will alter this momentum until....well until it just changes.
Replace the words ‘biotech stocks’ above for SEM and the exact same scenario applies. The SEM stocks seem irrationally undervalued right now. That will eventually change (but claims about irrational OVERvaluation by SEM shareholders will be juuuust a bit less frequent). The BT sector will eventually tank and everyone will scream ‘But GZMO’s pipeline is SOOOOOOOO wonderful. How could this be happening? There must be something fundamentally wrong with the company’ And guess what? There won’t be a damn thing wrong with the company. Nor will have anything changed with the logic described by Peter. Irwin Frankel says ‘At times the market is not rational’. The market is NEVER rational if your stock is going down and ALWAYS rational if your stock is going up. Furthermore, if a sector you’re not invested crumbles, you state, ‘Why of course, any bleeping idiot could see that coming. The market always spanks arrogance’ whereas if it’s YOUR sector and it defies your valuation hypotheses, you scream, ‘Manipulation!’ or ‘Those damn MM’s’ or ‘Fire the CEO’.
If I can receive gentle reprimands for citing Klic (which now has PE of 8 for estimated FY2000 earnings) while, in the same virtual breath, receiving the redundant lecture on GZMO’s wonderfulness, then the case for psychological factors outstripping EVERY other driving force in the market is patently obvious.
Rational valuation is completely in the eyes of the beholder. IMO, folks can pine on and on about valuation, but when the overriding forces in determining share price are fear and greed, you can get screwed very easily and very quickly by subscribing to theories of valuation determinants. It's quite baffling to see such interest in pure valuation theories for the BT sector after the huge speculative bubble of this spring (and with the glaring day-to-day example of the SEM stocks before us right now). If I once saw a BT valuation proposal start off, 'First and foremost, the most important factor in determining BT stocks prices is investor psychology and this can turn on a dime for no apparent reason. Beware that valuations for BT almost always change en masse with the ENTIRE SECTOR moving up in down in beautiful harmony. Thus the BEST APPROACH is to select a couple companies you like and sit tight for VERY LONG TIME. In short, contrary to almost everything you've been told, broadly speaking, highly specific stock selection may not be of crucial importance.'
And now, begin the lectures on why that last sentence is so very wrong. But please, no lectures about why the SEM companies deserve to be tanking and why WXYZ BT company is the best thing since lactose-free milk. |
