Let's try one more time.
Regarding PR:
1. Any PR that helps to add business is a good thing.
2. PR that reveals too much to the competition regarding customers and strategies is a bad thing.
3. A certain amount is legally required.
4. PR done solely to increase the stock price treads dangerously close to "hype".
5. Management has a broad discretion between the extremes, and if you don't like the amount of PR that a given company issues there are no doubt other stocks you can choose. I personally try to avoid stocks that issue a great deal of PR, especially spurious PR, because it is my expectation that they underperform the market long term, though I know of no research on the subject.
6. Promoting the stock to investment houses is very different than PR and is laudable. This type of promotion seeks to find long term investors, and finding long term investors can produce sustainable increases in valuation. PR/Hype tends to benefit traders primarily (note that I admit to being a trader on a portion of my portfolio), and to cause only short term valuation increases. There is no reason that a company should seek to benefit traders.
Regarding valuations:
1. Sometimes companies get "richly valued". When this happens they have a variety of alternatives. These include:
a. Doing nothing
b. Selling their own personal shares
c. Doing a secondary - this increases cash and book value, but normally causes the stock price to fall significantly, and sometimes for a prolonged period. Nevertheless this can be an excellent long term benefit for shareholders. This would be my choice if I were in charge. The cash is useful to have for a variety of reasons, though it could be used for acquisition if the opportunity presented itself.
d. Increase the level of PR trying to sustain the "rich valuation"
e. Use the stock for acquisitions (see below)
2. Stocks that are recent IPOs tend to be overvalued and historically significantly underperform the market.
3. Stocks with low PEs and low PSRs historically significantly outperform stocks with high PEs and high PSRs.
4. When stocks have high PEs and high PSRs either the stock must sustain tremendous growth for a prolonged period, or the stock price must fall. Eventually growth rates settle in below 50% a year for almost all companies, and the PSTs fall to a maximum of 10-15.
Regarding acquisitions:
1. If done wisely these can benefit companies. Usually they can prolong a period of overvaluation for a period, but eventually problems usually surface and the piper must be paid.
2. Companies that do acquisitions with stock historically significantly underperform the market.
3. Companies that do acquisitions with cash historically slightly outperform the market.
Conclusions
My evaluation of NETP is that they are doing an outstanding job. They are growing very fast, in the 400% a year range. They took advantages of a high share price to make sure that their future is secure. Without the strong cash position the price of NETP could well be much lower given the concern the market currently has about money losing internut stocks.
Furthermore, rather than focusing on PR which would benefit short term traders by increasing volatility, management is engaged in promoting the company to long term investors. This strategy typically produces little benefit in the short term, but eventually produces more sustainable increases. Furthermore, as evidence that this strategy is working, money flow on NETP has been significantly positive for the last couple weeks, and was even positive while the stock fell on Friday.
I feel comfortable owning this stock because:
1. They are doing a good job of promoting the product and growing sales.
2. They will become profitable soon
3. They have plenty of cash secured at a cheap price by doing a secondary while the stock was significantly higher than the current level.
4. They do a reasonable amount of PR, perhaps a bit more than I'd like to see, but not unreasonable given the rapid growth.
5. I think the product niche that they occupy will be an important one.
6. Even though they are a relatively recent IPO, and despite the fact that they don't have a low PE or a low PSR, these ratios are quite reasonable given the sales growth.
Thus I feel that NETP is reasonably valued right now. I did own NETP last year as well, and never felt that it was "grossly undervalued". Rather I thought it was moderately overvalued at the time, but I liked the niche. When it became grossly overvalued in Jan-February, I sold my shares at 51, but re-purchased the stock in the teens. Note that by comparison I would not feel comfortable owning EPNY at the current price. In fact they will make a good short at some point, in my opinion. I'm still kicking myself for missing the short on MSTR. I actually entered short orders at $250 on a couple occasions but the stock never traded high enough on those particular days.
Carl |
