I have seen many strong buy recommendations for stocks that have lost as much as 70%. For example, look at a very good stock, Western Digital, which rose to $52 when all the TAs were great and analysts were making very strong buy recommendations. In just a few months, the stock dropped to $15.
Yahoo! has risen 500% in one year with forecasts of explosive earnings growth and most of the current earnings coming from interests on the IPO money. I doubt this growth can be sustained, but the momentum play is hard to predict. When one of the major funds began dumping WDC at the peak of $52, the WDC thread was filled with posts of strong buy recommendations and high earnings growth estimates. I had sold mine at $48, and was waiting to buy if the price dropped further. No one believed then that WDC was headed to $15 and I am still reluctant to enter because of the DD sector. Why? Competition, and little barrier to entry. Yahoo! has almost no barrier to entry (as compared to WDC) and much greater competition. Briefing.com was highly recommending WDC those days with price targets of $65.
Yahoo! is a pure momentum play (IMO). The following explanation is strictly speculative, but it may tell a story.
* Just imagine someone (call him a manipulator) begins buying at ask and selling at bid starting at $15 per share.
* There are enough investors who use TA, i.e., buy a stock that is rising and satisfies some MA condition.
* The stock is held by a few major shareholders, with a small float.
* The manipulator raises the price in small volume (with some trading loss) to induce enough momentum buyers.
* The stock keeps rising with the manipulator buying at the dip and selling some of the accumulated shares to the momentum buyers as the price rises.
* Suppose that there is $100 mil trading loss in a year for the manipulator operating from a subsidiary of a parent company that is not required to account for the losses of its subsidiaries. [That is, the losing sub does not pay any dividends to the parent company and the law does not require a consolidated income statement.]
* The parent company holds 15 mil shares. In one year the parent company generates $55 (70-15) per share as profits, which is $875 mil.
* Even if you account for the $100 mil trading loss, the parent company earns a paper profit of $775 mil. This is a huge profit to induce the parent company to have a manipulating subsidiary. The parent company's stock could also rise if the stockholders can be cheated!
* Is this magic? Yes (at first blush)
* Can this momentum ever break? Yes, when one or more of the following conditions is met:
(i) TA-based traders become nervous because of the fear that the price may have risen enough.
(ii) Some institution writes a large contract of April 40 Calls (or some such calls), which forces the buyer (a broker) to short the stock to hedge the risk.
(iii) Some of the funds begin to sell large chunks of shares after giving rosy earnings forecasts.
(iv) Earnings fail to satisfy the WS wisper numbers.
(v) The parent company's manipulator goes bust.
Conditions (i) through (iii) have already been met, IMO. We may not need (iv) and (v) for Yahoo! price bubble to burst. Any comments?
Sankar |
