12:53 ET ******
Old Economy/New Economy : Suddenly, being old is cool. Kind of like a few years
back when Generation X said good-bye to grunge rock and said hello to the sound of
Tony Bennet. Of course, it wasn't like Tony Bennet was an up and coming star. After
all, he had already been around for years and had shown that he was deserving of his
success, but for some reason, a new generation found value in his timeless crooning
and provided the man with a newfound popularity-- so much so that he won a
Grammy. Well, the old economy stocks are enjoying a similar revival, one that has
been helped along by a new generation of investors who are discovering the intirinsic
value of blue chip companies that have been around longer than them-- even longer
than Tony Bennet. In a way, this sudden discovery has taken many market watchers
by surprise. Sure, the extent of the valuation gap between the old economy and new
economy stocks was abnormal, and needed to narrow, but few people, we would
argue, expected to see the blue chips rebound with such vigor, particularly with the
Fed in a tightening mode. What seemed more likely was for the tech sector to correct
and for the old economy stocks to hold their own, but not do anything too
astounding-- kind of like one would have expected Tony Bennet to do in the singing
profession as he got on in years. That hasn't been the case, though, as the blue chips
have astounded thanks, in part, to momentum investing-- a hallmark of this new
generation of investors. Yet, it is important to remember that this crew measures
returns in terms of days, not years. Hence, we wonder if this newfound popularity of
the blue chips can last. Seems strange to us that a stock like Coca-Cola (KO), which
was a whipping post for the investment crowd just three sessions ago when it hit a
new 52-week low, is now one of the hottest things going. Frankly, we like
Coca-Cola's long-term prospects, but traders are buying this stock now and other
stocks like it with such conviction, not because there has been a fundamental shift in
perceptions about its earnings, but because it is the cool thing to do-- kind of like what
Generation Xers were doing in buying Tony Bennet's CD. While Mr. Bennet is now
comfortably back in the mainstream of the listening public, the hoopla surrounding his
rebirth has died down considerably, much like we think the noise surrounding the
revival of the old economy stocks will die down when the tech sector gets back on
track. In short, the old economy stocks are back in the limelight, and could stay there
in the weeks ahead, but their rediscovered appeal will fade, just as Tony Bennet's
did.-- PJO
11:47 ET ******
Bankruptcy Realities : As a follow-up to the earlier Peapod story and the coming era
of Internet bankruptcies, it is worth considering just what bankruptcy means. PPOD
traded down to 5 1/4 pre-market and has continued to lose ground during regular
trading to its current 3 3/8 price. Even at this level, the risk/reward on PPOD is not
good, and therein lies the bankruptcy lesson. While bankruptcy for PPOD is not a
foregone conclusion, it is now a very real threat. And in bankruptcy proceedings,
equity investors are last in line when the assets of the company get divvied up. We
have not done a thorough analysis of the Peapod situation, but in many bankruptcies
the asset liquidation cannot even cover debt obligations and the equity is completely
eliminated. That's eliminated, as in wiped out, worth zero, gone. When you scan the
list of B2C carnage, understanding this point is critical. There is still a tendency on the
part of many investors to view a stock price relative to its 52-week high. If the stock
hit 80 and currently trades at 5, that's a great risk/reward, right? Absolutely wrong!
Forget about the 52-week high, it means nothing. The only real issue now for many
B2C companies is whether or not they will survive. And if they do not survive, the
downside on their stock prices is zero. The upside? That depends on current business
realities; it does not depend on the 52-week high for the stock. More often than not,
those highs were the result of a speculative frenzy that had nothing to do with the
underlying business. It is clear from the way that Peapod has traded that many
investors are poorly prepared for the coming Internet bankruptcy era, but the reality
will sink in quickly. All it takes is for one or perhaps a few stocks to take the final
death plunge to zero for investors to fully appreciate the downside risk of owning
equity in a company that is not viable. - GJ |
