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A couple of articles that might prove interesting to those who gather here.
The first one is the latest Jubak over at MSN. A good discussion on trying to find bottoms<lol>.
moneycentral.msn.com
The second article I've taken the liberty of posting below. It's from Friday's edition of Canada's Financial Post. A direct commentary on the "failure" of gorilla gaming.
Note: Please do not shoot the messenger. My intent here is not to rub salt in anyone's wounds. My own are bad enough these days. My compliments to all G & K followers in these trying times. While I do not necessarily subscribe to the author's conclusions, some of his comments regarding valuation might be worthy of reconsideration in the context of gorilla gaming in the future. Have a great weekend everyone.
The Gorilla Game's big losers
Wynn Quon
National Post
The anvil fell on Yahoo! shareholders this week. After the company announced its sales and earnings shortfall, the stock price fell to a new low of US$16. But this is just the latest in a series of anvils pounding the stock down from last year's all-time high of US$220. Stunned shareholders are staring at a losses of up to 93%.
By all measures, Yahoo! is a phenomenally successful company, a gorilla in the Internet search engine space. But investors got into trouble following a fatally flawed strategy popularized by The Gorilla Game, a 1997 best-seller that advocated buying shares in giant companies with virtual monopolies. Gorillas benefited from "increasing returns": Because their products were proprietary and the cost of switching to a competitor's wares high, they would only get stronger with time.
The book's advice looks ragged of late. Intel has dropped 57% in less than four months; Cisco, from a high of US$82 last March, is down 75%. Investors bought 808 million Cisco shares that month for US$58-billion. At yesterday's market price of $22.81, they are now worth US$18.4-billion. That's almost US$40-billion of shareholder wealth gone up in smoke. If we look at Cisco's entire market cap, the damage is a mind-blowing US$350-billion.
The Gorilla Game strategy has two huge holes. First, it fails to set standards of value. In 1997, when Cisco had a market value of US$54-billion, its authors claimed the stock was undervalued, nowhere discussing what valuation would be fair or, even more important, what would be too high. By early 2000, Cisco's market capitalization was a gut-busting US$560-billion. The Gorilla Game failed to recognize that the stock market eventually turns all good ideas (i.e. under-priced stocks) into bad ones. Without some meaningful way of distinguishing between cheap and expensive, the book misled investors into writing blank cheques with disastrous results.
In fact, The Gorilla Game was nothing more than a reincarnation of the disastrous Nifty Fifty strategy of the 1970s -- a list of several dozen companies, like McDonald's and Polaroid, whose market dominance was considered so absolute that they were no-brainer investments, their shares cheap at any cost. In 1972, McDonald's sold at a P/E of 83; Polaroid at a P/E of 90. A few years later, McDonald's P/E had collapsed to 9 and Polaroid's to 16. The '70s investors were mere pikers compared to their brethren 30 years later. Cisco sold at a P/E of over 200 and, even now, has a P/E of 60. Yahoo! had a P/E of 2000 when Internet mania was at its nuttiest.
The Gorilla Game also ignored the Laws of Growth. It advised selling a gorilla stock only should a new, disruptive technology threaten the gorilla's franchise. But, to their dismay, investors eventually discovered another time to take profits: before gorillas' growth rates have become unsustainable and investors face the infamous "earnings surprise." The stock price can then fall so fast that investors don't have time to bail out. Take Intel, for example. With US$32-billion in sales in the last 12 months, it needed more than US$10-billion in new sales to grow at a 30% rate. Gorilla gamers who flocked into Intel's stock were doomed to be disappointed. Last September, when Intel warned of slowing sales, the stock fell 20% in a day. The more successful the gorilla, the faster its market saturates.
In the PC market, it was clear at the beginning of this year that the North American market was close to saturation -- over 50% of households owned a computer, and no new killer application required users to upgrade. In Cisco's Internet equipment industry, annual doubling in Internet usage is over. Cisco must now deal with low double-digit growth (10-15%) that becomes increasingly sensitive to economic factors.
Will gorillas ever regain their lustre for investors? Yes, but not soon. A cautionary note for those keen to buy the dip: It took over a decade for the Nifty Fifty to recover from the price collapse of the 1970s.
Wynn Quon, a technology analyst, was former director of R&D at Mitel Corporation. E-mail: wynn_quon@hotmail.com
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