Some other "short" thoughts
You know this guy?
Aram Fuchs, CEO, FertileMind.net
Interviewed by Lauren Keyson
I met with Aram Fuchs, the king of SELL recommendations, at the Bull Run Restaurant. While he dined on a filet mignon, and I ate a so-so marinated tuna, he explained how his analysts had no biases, and that their only goal is to produce good research. "We know what works on the Internet and what doesn't ? we also understand from a business point of view that these equities are incredibly overvalued."
[LAUREN KEYSON] So how do you feel about equity analysts?
[ARAM FUCHS] In one sense, we think they're as bad as chop shops; they just wear pinstripes. This didn't used to be the case, but now it really is. They've lost their integrity because they only put out BUYS, and their BUYS are on their own investment banking clients. People are really sick of that and have lost money because of it. That's why we're only going to put out Strong Buys or Sells. Those are the only two rankings we'll have.
[LK] What do you think are stocks right now that people should sell?
[AF] AMAZON.COM (AMZN). We say it's a strong, strong SELL.
[LK] So you're bold enough to say it's a strong SELL.
[AF] We're the only ones out there saying it. Everyone has a feeling in their gut that they know it's a SELL, but they haven't heard anyone say it.
[LK] Why?
[AF] The model is broken. They used to have no inventory and no warehouses, so they could be the most efficient retailer. But not only do they have the burden of developing warehouses around the country ? and eventually around the world ? they also have incredible marketing costs because they don't have a store. For instance, when you're in the suburbs, WAL-MART (WMT) just puts up a sign and has a store. People drive by and say, "Oh yeah, I've got to go to WAL-MART and pick up ten things." AMAZON doesn't have that, so they've had to develop the AOL agreements and the TV-based advertising, and incur the advertising costs. It's incredibly expensive. But they haven't been able to compensate for that with large gross margins because it's so easy to comparison shop on the Web. For a dollar, I'd go to BARNES & NOBLE.COM (BNBN) rather than AMAZON. In the real world, KMART (KM) is on the other side of town, or it's closed. In the cyberworld, everyone's always open and they're right next door.
[LK] What is the next strong SELL you've got?
[AF] The next strong sell would be the new TRAVELOCITY (TVLY), the merged Preview Travel and TRAVELOCITY. We think travel is another commodity business. The average airfare is somewhere around $300 and the commission is going down to $10. Again, if you look at the marketing costs that they're forced to spend on AMERICA ONLINE (AOL) and EXCITE (ATHM), there is no way they'll make money on an operating basis. So we think that's a SELL.
The next one would be EARTHWEB (EWBX). While it could be a very good niche product, their marketing costs are implying that they think every Jim and Jane in America will be using their services. The revenue and page-view growth are not showing that that will happen. So we think they're just wasting their cash.
[LK] You're not afraid of repercussions from SELL recommendations?
[AF] We have nothing to lose. We sense an opportunity here for objective research and people are responding to it. We can build our reputation. If you're bold and right, it doesn't take much to build a fantastic research house.
[LK] How are you finding out about the revenue and page growth?
[AF] It's all publicly available data. As you can imagine, management is not to keen to talk to us, because they know of our reputation.
[LK] No one in management will talk to you?
[AF] We don't need that access. People try to throw that as a wart on our reputation but it's not really true. The publicly available data is really helpful. The truth is out there. It's in the data.
[LK] They won't even talk to you to try to convince you, though?
[AF] I think that will be the next step in our growth. When companies start coming to us, trying to convince us.
[LK] So the first one is AMAZON, the second one is TRAVELOCITY, then EARTHWEB. Do you have any others?
[AF] We think PRICELINE (PCLN) is a sell. We just think the movement into groceries is being subsidized by the company. We don't think it's financially viable. Margins on groceries are incredibly small to begin with, so there's no way they can make money just by lowering that price. They're going to have to lower it below cost and try to make it up with market research money and things like that. We don't think they can do it. We don't think they'll get enough people that will spend an extra 25 minutes on the WEB to get a better price on milk. We don't think they'll get enough mass in order to make money.
[LK] Who else does groceries? Don't they have the same problem?
[AF] Well PEAPOD (PPOD) is the perfect example. PRICELINE is different from PEAPOD because PRICELINE isn't delivering groceries. You go to WALDBAUMS or whoever.
[LK] You mean PEAPOD delivers?
[AF] Yes, PEAPOD delivers. PEAPOD would go to a supermarket, pick the stuff themselves, then deliver it to you. WEBVAN (WBVN) has its own warehouse where they pick it from the warehouse. That makes the difference. But PEAPOD is going bankrupt.
[LK] Why?
{AF] Because they've run out of cash. They don't have much cash left, and they're burning through it, because the model is very expensive to run. Doing the individual shopping, only charging a slight premium, and delivering it to homes? It was too expensive, and not enough people wanted it at the same time. It was a funny dynamic where the demand wasn't there and supply wasn't there either. It was very difficult.
[LK] You've given us some SELLS; now give us a BUYS.
[AF] HOOVERS (HOOV) is our Strong BUY. We think it's a great research, niche product which is perfect for the web because they were able to use the ubiquitous distribution of the Internet to get a much broader customer base than if it was in their old print or CD-ROM product. The stock is selling at a little over two times cash. Revenues are growing nicely and they're not spending outrageous amounts on marketing.
? Transcibed by Eric Lopkin, Edited by Paul DeMartino |
