Billy, the archives here will show I used to call your picks 'concept stocks'. I beg to be corrected, I should have called them 'story stocks'!
Btw
No one pumped Pcln better than you.
>by J.T. Farley
Spare a thought for the pre-IPO technology company.
Gone are the days of VA Linux (LNUX), the king of the first-day pop. It soared nearly 700 percent on its first day of trade in December 1999, to nearly $300. Now a single share won't buy you lunch.
VA Linux is a classic "story stock." Its valuation soared based solely on its role as David to Microsoft's (MSFT) Goliath.
Compare this to the fate of Loudcloud (LDCL), the brainchild of Netscape's enfant terrible Mark Andreessen. After lowering the IPO price and expanding the offering size, Loudcloud debuted March 9 at $6, and currently is lurking below that price.
A good story
The whole IPO market is moribund -- with just six tech companies coming to market this quarter -- down from almost 100 in the halcyon days of Q1 2000.
Back in the day, as Warren Buffett is happy to tell anyone who will listen, companies raised money in the equity markets based on fundamentals -- a tangible business, growth prospects and even earnings, or at least a clearly defined (and relatively short) path to profitability.
But every so often the market becomes enamored of story stocks -- companies that promise to capture a trend, to shower their investors with untold riches by riding a wave of technological innovation. The story of story stocks is nothing new -- witness railroad companies more than a century ago, motorcar companies a few decades later, radio stocks in the 1920s, and most recently, startup technology companies, especially Internet plays.
Glory daze
Sitting here in the era of Nasdaq 1000-and-change, it is hard to believe how well some story stocks fared.
Priceline's (PCLN) name-your-own-price-for-airline-tickets model was once so hot, it had to be patented, or so thought company founder "Screaming Jay" Walker. The stock caught fire, and at one point the company had a market capitalization bigger than the largest three U.S. airlines combined.
Then there's Amazon (AMZN), the world's biggest bookstore… no, book and music store… no, wait, let's sell television sets and give people free shipping. Damn the profit margins, full speed ahead!
(Full disclosure: I bought twelve of them. Thank you, Jeff Bezos.)
The list of story stocks is endless. EToys and Pets.com are no doubt commiserating about how their websites failed to change the toy and pet supplies worlds at this moment in their own special corner of Dotcom Heaven.
Why, oh why?
We are left with questions: Why were many investors so gullible? Will they fall for it again?
The bubble initially was funded by venture capitalists. They serve as theater producers, auditioning new acts and then taking them on the road. As William Gurley noted in a prescient Fortune column in November 1999, "Many people are uncomfortable with the notion that good storytelling… is critical to startup success. Venture capitalists have no such reservations."
But punters in the stock market got over their qualms. Gurley noted that the average time from seed funding to IPO dropped from 6.5 years to 2.5 in the late 1990s. Up until early last year, many investors were falling all over themselves to get a piece of these untested acts.
And once a story stock catches fire, it often gains juggernaut-like momentum. Billionaire financier George Soros explains why, in his 1987 book "The Alchemy of Finance." According to Soros' Theory of Reflexivity, companies can use inflated expectations to issue new stock at inflated prices, and the resulting increase in earnings per share then validates the inflated expectations.
In other words, fundamentals are supposed to determine the stock price, but in some instances the stock price can alter the fundamentals. Amazon stock surged to $400 a share (pre-adjusted for splits) not because it was "worth" it, but in part because it had already skyrocketed to $200.
Until next time
But anomalies like these eventually end in tears. "What we're seeing is the dark side of the reflexive loop," observes CS First Boston's Chief U.S. Investment Strategist, Michael Mauboussin. "When the stock price starts deteriorating, all of a sudden managers have a hard time retaining and recruiting employees, they become less attractive...and they can raise no additional capital even if they have wonderful opportunities."
This is not to say that the story stock phenomenon is an inherently bad thing. Tech stalwarts like Dell (DELL), Oracle (ORCL) and Texas Instruments (TXN) started publicly traded life as story stocks. The equity market (and the junk bond market) offer an important conduit for funneling capital to innovative companies. But once investors are burned by story stocks, they are understandably shy for some time to come.
Lucky for new companies, the market has a short memory. The siren song of the story stock will again be heeded. As CSFB's Mosboussin has it, "I think [story stocks] are dead. I am not sure that will be true forever." |
