Todd take- BEYOND EARNINGS
The quality of the earnings among these companies, and indeed the Tech sector, obviously varies a great deal. So does the quality of the companies themselves. But looking at them as stocks, the variety fades away and we are left with a troubling uniformity that has been a problem to us for many, many months. And the problem is this: From the perspective of a long-term investor Tech stocks remain wildly overpriced.
For the last few years, including the mini-rally that brings us right up to today, Tech stocks have belonged strictly within the purview of speculative investors.
You might own one of these Tech stocks and, not considering yourself a speculative investor, take exception to that statement. But the chances are that if you bought that stock in the last couple of years, there is no way you can compare it to historical valuations and say you bought it for a reasonable price.
The fact is that despite full-fledged debunking of the New Economy revolution; despite the evaporation of opportunities for upstart Techs to corner a new sector of the Tech world; despite the "traditional" growth that has now set in among Tech giants that DO dominate their markets -- despite all of this -- investors continue to reward Tech stocks with a valuation scheme detached from reality.
This scheme collapsed once in 2000, and it is surely going to collapse again -- which is precisely why we spent the last year NOT recommending any Tech stocks.
THE SPECULATIVE GAME
You might respond that by refusing to go along with the ride we missed out on making a lot of money. If, you might say, we recommended former Internet stock darling AKAMAI (AKAM, $5.75) at the start of the year, we would be up 200%.
Yes, we would indeed be up 200%. But in January of 2003 the only exceptional thing about Akamai shares (and you can put any of dozens of Tech names in Akamai's place) is that they had already been on the rise for a couple of months. Indeed, based on its valuation, its market, the state of IT, and the state of the economy, those shares should not have been rising and certainly had no plausible reason to rise further. If you invested in Akamai, then you were simply speculating that the stock would keep going up for no reason at all.
Furthermore, while it is easy to say that buying Akamai in January would have been a good idea, had you done so the hard work would have promptly begun. Why? Because now that you owned stock but had no clear notion of what it is worth (Akamai lost $1.44 a share in 2002 and so had no PE), how to value it, or what direction it should move, was impossible to answer. You were operating in a netherworld. And THIS is where the true difference between a long-term investor and a speculator lies.
Where a long-term investor can look at the fundamentals of a company, pay a reasonable price for identifiable, long-term growth, and sit back and watch his or her portfolio grow, the speculator faces a dilemma. The speculator has to admit that, "When I bought this stock it was rising for reasons I cannot easily identify. I paid a lot for a company losing money, and I now cannot be certain what its shares are truly worth. With that in mind, I can't be sure what anyone would rightly want to pay for them. Yes, I will make a lot of money if I sell this stock now -- but will I sell it? I don't know. It could keep going up."
That is the problem. It could keep going up, for a while. But without a clear reason for it to rise in the first place, it surely won't rise forever. But just as it began to rise one day without warning and without reason, it will one day without warning just as surely drop, and drop like a stone. |
