Forbes.com
Confusing Low Price With Value
By David Simons
Here's a sign that the bear market in Net stocks isn't over: Bulletin board busybodies and investment commentators who should know better are still chatting up the most beaten down dot-com shares as possible ``value plays.''
They were doing the same thing last May, two months after the Net stock rout began. At the time, we looked at a sample of 15 net stocks trading below $5. They were down an average 88% from their all-time highs. Having lost so much, it seemed they couldn't loose much more. They did.
Today those same stocks are down an average 76% from their May prices. (See table.) The best performer was CDNow. It was acquired in August by the privately held publishing giant Bertelsmann for $3 cash per share --a 9% loss versus the May 23 pricing date of our sample. The other acquisition, American Greetings' (NYSE: AM - news) buyout of E-Greetings (Nasdaq: EGRT - news), was done at 68% less than the May price of E-Greetings stock.
Worse, four of the 15 companies in the May sample went into liquidations that, on average, have returned to shareholders 80% less than the stock price in May.
Undaunted, the dot-com-dumpster rummagers continue to screen for ``undervalued'' situations. The focus is on stocks that trade near or below the amount of the companies' cash holdings per share. Those screens often have two serious flaws.
Stale cash data: A widely disseminated study created with price data from Feb. 2, listed 18 stocks trading below $2 that were down at least 90% from their all-time highs and trading ``below or near cash.''
Not only were the prices incorrect, the cash figures were as of the end of September. All but one of the companies hadn't yet reported year-end financials. That's a real problem when the companies are burning up to 30% of their cash each quarter.
For example, at its Feb. 2 closing price of $1.16, free Internet service provider NetZero (Nasdaq: NZRO - news) was valued 34% less than the $1.75 per share of the company's $220 million cash as of the end of September. But by the end of December, as reported by the company on Feb. 7, cash was down to $181.8 million. That's 69 cents per share, meaning that the stock's $1.16 price on Feb. 2 was, in fact, a 68% premium to NetZero's cash per share.
Similarly, the $1.53 Feb. 2 closing price of business-to-business portal outfit Viador (Nasdaq: VIAD - news) was just 22% greater than the company's $1.25 per share of cash as of Sept. 30. But fourth-quarter financials announced Jan. 30 reported cash down 29% to $16 million from $22.6 million in the third quarter. That made the Feb. 2 stock price a hefty 74% premium to cash.
The screen miesters may have thought they were discovering nuggets missed by the market. In fact, the market was smarter. It had already adjusted prices in anticipation of the cash burn.
The other flaw of the studies is focus on cash alone. As a measure of value, cash is limited by debts. ``Burn rate,'' which has become popular among investors, isn't always the best yardstick of that.
More useful is ``working capital.'' That is a company's current assets, such as cash and accounts receivable, minus current liabilities, such as accounts payable and total borrowings due within a year. Working capital essentially reflects the total financial resources that a company has available to conduct and grow the business without disruption. Cash burn alone can overstate that ability.
For example, while Viador burned 29% of its cash during the fourth quarter, leaving $16 million in the bank, working capital plummeted 65% to $6.4 million. Recognition of that perilous state may explain why, despite the company's announcement of cost-cutting measures, the stock on Feb. 13 fetched 97 cents--one-third less than it did on Feb. 2 when some considered it a value candidate.
Yet to read the comments of the Net stock screeners, what follows the ``cash'' line on the balance sheet is just an obscure appendage to the income statement.
In July, a well-known curator of Net stock cash-burn data touted selling-for-less-than-cash stocks from a ``value screen'' done with March quarter cash figures and June 30 prices. The picks have since lost 53% on average, without a single winner among them.
If you become tempted by lists of low-priced Net stock ``value plays,'' you'll be better off throwing dollar bills into the kitchen disposal until the urge passes. |
