www.tulipmania.com
(nice article - and the domain name is still available :))
biz.yahoo.com
Monday July 20, 9:06 am Eastern Time
Company Press Release
SOURCE: Riley Capital Research
The Riley Report: Tulipmania.com
HOUSTON, July 20 /PRNewswire/ -- Every serious investor and
student of the rich history of market psychology knows the
cautionary tale of the grand dementia that swept Holland in
the 1630's: Tulipmania. It is widely regarded as the mother
of all bubbles, surpassing the absurdity and egregiousness
of all of the other speculative manias that would follow it;
such as the Mississippi Scheme and the South Sea Bubble in
the early 1700's, the Roaring Twenties American stock
market, and gold and the Japanese stock market in the 1970's
and 1980's.
Tulipmania likely earned its status as the ultimate
financial mania due to the fact that the object of its
desire was a commodity that had never before (or since) been
considered a store of value (unlike gold and silver) and had
no real utility (unlike land and oil). It did, however,
offer the promise of a recurring revenue stream (like
business ownership via common stock) from the sale of
cultivated bulbs -- hopefully at ever higher prices. The
height of the bubble wrought by Tulipmania was breathtaking,
with the price of tulips rising by 5900% from late 1634 to
early 1637.
The demand for tulips was so great that by 1636 they were
regularly traded on the Stock Exchange of Amsterdam and on
many locals marts in towns throughout Holland, and for a
while they even traded at the Exchange of London and in
Paris. ''Tulip-notaries'' were appointed to help manage the
booming trade. ''Tulip-jobbers'' traded the bulbs for
short-term gains. Futures contracts were created to ensure
future delivery of bulbs at agreed-upon prices.
The mania soon trickled down from Holland's upper class,
with ordinary citizens selling their property and land to
reinvest the proceeds in tulip bulbs. Fortunes were made
overnight. The boom created a wealth effect that ignited
inflation in other assets in Holland. The price of houses,
land, horses, carriages, and luxuries of every sort rose
dramatically.
Interestingly, the passion for tulips was mostly confined to
Holland. In Charles Mackay's classic book, ''Memoirs of
Extraordinary Popular Delusions and the Madness of Crowds'',
the chapter on Tulipmania recounts the rather humorous story
of a foreign sailor visiting Holland. The visiting sailor,
uneducated in the value of tulips, steals a bulb from a
nobleman's table, thinking it is an onion. By the time the
nobleman catches up with the sailor at the docks, he has
consumed the bulb with his lunch of red herring. The value
of the bulb that the hapless sailor ate? 3000 florin -- an
amount that would have paid for 25 fat oxen at the time. The
poor sailor spent several months in prison for his felony.
Alas, it all ended rather poorly once the greatest fool had
paid the top tick. A nagging fear that ''investing'' in
tulips had instead become speculation began to spread. As
this fear supplanted greed there were soon many offers and
no bids. Tulip prices fell 93% in the 10 months after the
market peaked. Fortunes were lost, lives ruined, and
Holland's economy was devastated. There was no ''dead cat
bounce''. One hundred years later tulips sold for less than
1/2 of one percent of their peak prices.
The purpose of this history lesson? Today many market
pundits have likened investors' appetites for anything
Internet to those of Hollanders' for tulip bulbs. Might they
have a point?
If one were to answer that question from the viewpoint of a
strict Graham and Dodd ''value'' disciple, the answer is an
unequivocal and emphatic ''yes!''. As Graham and Dodd wrote
in their book ''Security Analysis'':
''Unseasoned companies in new fields of activity ... provide
no sound basis for the determination of intrinsic value. The
risks inherent in the business, an untested management, and
uncertain access to additional capital combine to make an
analytical determination of value unlikely if not
impossible. Analysts serve their discipline best by
identifying such companies as highly speculative and by not
attempting to value them, even though we recognize that
there will be pressure to make valuations of initial public
offerings (IPOs) and other unseasoned issues. The buyer of
such securities is not making an investment, but a bet on a
new technology, a new market, a new service, or an
innovation in established product markets. Winning bets on
such situations can produce very rich rewards, but they are
in an odds setting rather than a valuation process.''
Try telling that to anyone who was allocated shares of
Broadcast.com (Nasdaq: BCST - news) at $18 on Thursday
night. Better yet, try telling that to anyone who paid the
top tick of $74 on Friday morning. It's a safe bet that they
have never cracked open Graham and Dodd's text, much less
the Broadcast.com prospectus.
So what are we left with if we cannot value Internet
companies with traditional fundamental analysis? Is this
very question indicative of Tulipmania.com?
Again, a strict value investor or analyst would answer
''nothing'' and ''yes'' to those questions. But such an
investor or analyst would also likely not have owned or
recommended any of the top-performing stocks in the S&P 500,
much less any Internet stocks, since 1994 -- and as such
would have missed all of the amazing upleg that began in
January of 1995. So unless one is content to remain in cash
while awaiting the end of the current ''mania'' in this
''overvalued'' market, one must accept reality and join the
fray.
Wall Street's sell-side analysts have stretched mightily to
meet the challenge of valuing Internet companies. Since most
of the companies have no current earnings, or prospects for
earnings for years to come, analysts have made enormous
leaps of faith regarding their ability to see the distant
future. Analysts have been forced to muster a power of
clairvoyance Nostradamus would have envied and peer ahead
into the next century to estimate earnings that are then
discounted back into today's dollars. They have also been
forced to focus on the metrics that are currently
measurable; such as revenue, membership, and page views, in
the hope that gains in those categories will one day
translate into profits. Obviously, neither method would be
acceptable to Graham and Dodd.
I personally believe, and have previously written publicly
in a satirical manner, that the passion for some Internet
stocks does indeed smack of Tulipmania in that investors
seem eager to pay almost any price for first-to- market and
marquee brand names -- with the Broadcast.com IPO being the
latest example. Shares of Yahoo (Nasdaq: YHOO - news) and
Amazon.com (Nasdaq: AMZN - news) have also been bid up to
price levels that clearly discount an enormous amount of
future growth. Still, I do believe that investors are
earnestly trying to value these companies' competitive
positions and future earnings streams, and not merely hoping
a greater Fool will take them out at an even higher price.
Thus, I have only used the term ''Tulipmania'' in a
sarcastic vein -- contrary to the charges recently made by
an aspiring muckraker who cynically twisted my comments out
of context.
As long as the demand for ''blue-chip'' Internet stocks
remains strong and the supply limited, they should hold or
''blossom'' from their current valuation levels. I continue
to believe that this will inspire confidence in investors to
reach for better value in some of the second-tier companies
that have more room for multiple expansion, and that
relative valuation arguments are thus sound and salient.
Egghead.com (Nasdaq: EGGS - news), for instance, still
trades at little more than 4X its forward run-rate Internet
revenues, vs. almost 17X for Amazon.com. Zapata's (NYSE: ZAP
- news) emerging Internet portal business is valued at less
than 1.3% of the market cap of YHOO, while having registered
many more than the mere 230,400 users such a market cap
implies on a comparable per user basis. I continue to
believe that such yawning valuation gaps are likely to
narrow as the fundamentals continue to unfold in the months
ahead.
The Riley Report is written by Louis Riley, principal of
Riley Capital Research. It is distributed on an occasional
basis to provide timely commentary and opinion on individual
stocks or industries that are making news. Opinions
expressed are subject to change without notice.
Riley Capital Research is a research boutique that
specializes in highlighting investment opportunities that
have frequently been overlooked by most investors and that
are not followed by the majority of Wall Street sell- side
research organizations.
This report should not be construed as a solicitation or
offer of any kind. Neither Riley Capital Research nor any of
its affiliates have received any compensation of any kind
from any of the companies mentioned in this report.
Mr. Riley and affiliates of Riley Capital Research currently
hold long positions in the common stock and/or derivatives
of Egghead.com and Zapata Corp., and Riley Capital Research
recently issued a ''Strong Buy'' recommendation on both of
those companies' shares. Mr. Riley and affiliates of Riley
Capital Research may from time to time hold long or short
positions in the other securities mentioned in this report.
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