Darrell, the Individual Investor piece is very odd. I'll post it here and comment.
"CMG Information Services Inc. (NASDAQ: CMGI) has surpassed even our
wildest expectations. The past three days have been pure euphoria. The stock's meteoric rise has pushed our value investment thesis out the window. Based on our valuation model that uses just five companies in CMGI's fold, plus cash, we come up with a valuation of $65 per share, with Lycos at $68.75 per share. This means CMGI trades at a 54% premium to our valuation with the stock reaching $100 per share today. With CMGI up more than 40% in just three days, the wave that we have been riding is at a peak and that's why we recommend readers Sell CMGI to recognize a 360% return since the Magic 25 was introduced in November. CMGI still represents the best way to invest in the Internet, however, the latest valuation is a bit too much. Sell and wait for a better price to re-enter.""
II recommended CMGI in the low 20s. It had fallen to that level after the initial enthusiasm for Internet stocks (they haven't always been popular). As II says quite explicitly, it operates on a "value investment thesis." According to value investing dogma, you might look for unfairly beaten down stocks, buy them cheaply, then sell when the stock reaches an idustry average P/E. But what is an industry average P/E for an Internet company? No one knows. The only way to know for sure if this is "euphoria" or "mania" will be in retrospect. So we have an idea of where II is coming from.
II goes on to say their valuation model uses "just" five companies. But CMGI in fact is involved with far more, many of which have not IPOed. Therefore, the valuation model is skewed, as the "just" implicitly concedes. If II, as Darrell observed, still sees CMGI as "the best way to invest in the Internet" and admits, using a conservative method of valuation, a price of over $65, then I must conclude two things: (1) This is a trading call; (2) the stock no longer fits the style of investing favored by II.
This is paradoxical, because value investors aren't typically thought of as traders. Yet if the stock falls 20% to "intrinsic" value, presumably II would be eager to buy back in. My feeling is that CMGI will certainly grow with the Internet. Stocks get ahead of themselves, and stocks pull back. But to sell because you've seen a quick profit violates a fundamental rule of all trading, which is to let winners run. I should think that goes double for strong stocks in strong sectors with growing markets. My surmise is that II is experiencing a conceptual dissonance arising from an investment style. In a recent book, "Guerilla Investing" (regrettably the author's name escapes me; it might be Siris), the author asks a simple question: Why are there buyers and sellers at various price levels? It's because of variety of investment styles. Contrarians buy beaten down stocks but sell shortly after they begin to return to favor; value investors might overlap but sell when valuations, by their lights, become "euphoric"; momentum investors buy when a stock is running. Who is right? At what point, and with what new evidence, does an evaluation change? I submit much has to do with style, in the sense I'm describing, rather than substance. A confusion of styles explains why the II stance comes across as muddled.
Incidentally, a reversal on big volume isn't a fabulous technical sign. But CMGI is so volatile--witness its recent behavior in the 50s and low 60s--it's very hard for me to read. I'll need more than an II sell--or a Zachs, which has been stuck on a sell as it has gone up and up, I believe--to exit.
J |
