Glenn, here is my take on AOL and YHOO. Before I step into this discussion, which I have mulled over in my head for the past month, I would like to note some points that help in me making my hypothesis clear.
1) Stock movement is visible and greatly magnified when the money manger of a fund steps in to buy or sell. Retail investors make trading moves but do not double or triple a stock nor cut it in a half or a third.
2) The money managers, hedge fund managers etc. are part of a clique, club or whatever (have a collective thinking). They are on one side and us on the other. When we do not invest in their professionally managed funds and go at it with equities on our own then we our challenging their profession.
3) Sure the money managers compete among themselves in terms of whose fund does better (so they get more inflows hence more bonuses) but they do not deviate from the fact that they need to buy whatever goes up lest they get left behind.
Here is where them and us deviate. Although our ultimate goals are the same, to make money, the way we go about is different. Simple reason being that for us to make money we have to risk our own money and for them its not the same. The emotions and therfore the decisions taken thereby are different. They can afford to take much larger risks as they have a vast pool of funds, execute trades faster and cheaply.
So with respect to AOL and YHOO it comes down to sectors and the leaders. If a MM wants to invest in the internet arena he asks himself :
Are there any surprises in the arena. Could there be competition springing up? Is there any geographical economic slowdown, margin pressure ? Will the product demand and superiority remain as far as I can see (1 quarter).
When these questions are answered satisfactorily he will pour money into the leaders with no regard to valuation. You see, he and all his buddies are doing the same thing. They have to own these stocks. They do not want to get caught with their pants down on the ones that violate the usual questions. AOL and YHOO are companies in a fairly new sector where its hard to identify problems and easier to speculate a rosy picture. The one they could do that to they finally crushed it : Netscape. When Netscape went public all the scenarios were bright and it shot up from 28 to 175. But when Microsoft came on to them all the "concerns" regarding margins, product demand, competition started creeping so they switched from being long to short collectively. Now when the company is actually making money they are ignoring it.
Last year in Nov when AMAT announced its earnings the stock was trading lower in after hours, as the earnings were lackluster, yet the next morning AMAT opened up 3 and went from 35 to 105 in 7-8 months.
What had happened that night was that an analyst from DMG and others decided that was the bottom for the sector and since their funds had loaded up in the clearance sale of July 96 they spread the word to the world. All earnings in the following quarters were much lower than the ones in the previous years yet the price was climbing. All they did was change the PE multiples being awarded to these companies from about 5-8 to about 25-30.
I hope I didnt get too sidetracked from my take on this but I reached one major conclusion : it pays a lot to be a contrarian. When everthing looks the way it is now then it is not necessary it will be that way tomorrow.
MU was left for dead in July 96 at 20 and a year later triples (thanks to Tom Kurlak). Whether it stayed at 60 is another matter the point is one has to have the discipline to wait for the opportunity and then take it. There are lot of beaten stocks trading at or lower book value today and I feel the ones with 2 quarter stories like EFII, APM etc can fetch 30-50% in 12 months quite easily.
-hitesh |
