Commentary: Putnam picks onetime Internet boom companies
By Mark Hulbert, MarketWatch
Last Update: 12:05 AM ET Apr 27, 2006
ANNANDALE, Va. (MarketWatch) - The Turnaround Letter is recommending what?
The newsletter's editor, George Putnam, is by all measures a genuine contrarian, favoring stocks that have been beaten down and are so out of favor that they may represent (hopefully) good long-term value. Unlike many other advisers who say they are contrarians but who turn out to secretly favor the glamorous stocks that are Wall Street's current darlings, Putnam actually walks the walk.
In fact, according to a study of the investment newsletters monitored by the Hulbert Financial Digest, conducted by Andrew Metrick of the Wharton School at the University of Pennsylvania, no service is further away from the glamour end of the value-vs.-glamour spectrum than the Turnaround Letter.
Furthermore, Exhibit A in the case for avoiding glamour is what happened to Internet stocks in 2000. As is obvious to nearly everyone now but at the time to only a few advisers like Putnam, such stocks were being bid up into the stratosphere by investors who had lost touch with reality.
So I definitely sat up and took notice earlier this month upon receiving the latest issue of Putnam's newsletter. In it, he recommended the stocks of three companies that, perhaps more than any, epitomized investors' fantasy thinking at the height of the Internet boom.
The three firms are all Internet incubators, companies that help start-up Internet companies get off the ground in return for an ownership stake. Such firms definitely captured investors' attention in the go-go years of the late 1990s.
Chart of CMGI
As Putnam puts it, "even in that era of extraordinary valuations, the Internet incubators stood out. For example, when the stock of CMGI peaked at 163 (split adjusted) in early 2000, the company had a market capitalization of more than $46 billion. At that time CMGI had revenues of $175 million, giving it a price to sales ratio of about 260. And the company had operating losses of $126 million."
What has changed over the last six years to these internet incubators to interest a contrarian like Putnam? The most obvious, of course, is that their stock prices are a lower now than then - a whole lot lower. A share of CMGI (CMGI
CMGI Inc.) , for example, closed Wednesday for $1.45, less than 1% of its all-time high.
An equally important development in catalyzing Putnam's interest is that, in his opinion, these incubators have transformed themselves into "real businesses."
Putting these two factors together, Putnam believes that these incubators now "represent interesting long term options on some potentially promising new ventures."
The three Internet incubators that Putnam focuses on in particular are:
* CMGI. "CMGI has developed a substantial supply chain management business with annual revenue of $1.1 billion that generates a small profit. Its price to sales ratio today is a much more reasonable 0.66. In addition to its supply chain business, CMGI still has a portfolio of 19 venture capital investments ... Moreover, CMGI has little debt and $163 million of cash and marketable securities."
* Internet Capital Group (ICGE) . "ICG's annual revenues are a still modest $50 million, but it has interests in 20 portfolio companies, plus cash and marketable securities of about $200 million." ICGE closed Wednesday at $9.25, versus a high of more than $4,000 per share in 2000.
* Safeguard Scientifics (SFE) . This company "has annual revenues of a little over $186 million. It owns interests in 12 portfolio companies and has cash and marketable securities of about $170 million." It closed Wednesday at $2.50, vs. a high of near $100 per share at the height of the internet boom.
One indication of how out of favor these stocks currently are: Two of these three stocks aren't recommended by any other newsletter that the Hulbert Financial Digest tracks. And the third, SFE, is recommended by just two. |
