What Michael Dell and Madonna's Underpants Have in Common:
What Michael Dell and Madonna's Underpants Have in Common
By Christopher Byron
Special to TheStreet.com
2/25/99 1:38 PM ET
From opposite ends of the Wall Street food chain come two recent developments of note, summarized as follows: In Wall Street's increasingly headachy mood, neither a share of Dell (DELL:Nasdaq) nor a pair of Madonna's underpants seem to carry the sex appeal that some folks had been counting on only a couple of weeks ago.
Hold on and I'll explain why. First let us undertake a brief update on the sea change in mood that has swept across Wall Street in recent days. Some learned types will tell you the gloom derives from Alan Greenspan's move last year to cut interest rates when he should not have -- with the result that the economy is now so strong that the bond market is weakening and dragging stocks down with it. Others will say it's all got to do with the room-emptying complexities of monetary policy in Latin America and other such places. Who's right I don't know. All I know is that people on Wall Street are no longer smiling.
Gone is the happy-faced scramble of buyers back into the market following last autumn's sharp correction -- the bounce-back optimism that sent the Dow industrials soaring by nearly 20% between October and year's end. Gone is the mindset that, right up until the last couple of weeks, has viewed every selloff as a chance to buy more (of what, it doesn't seem to matter). This indiscriminate buying frenzy sent a gilt-edged Nasdaq stock like Dell up by 37% to 108 per share in the last two weeks of January, while pushing a junk issue like theglobe.com (TGLO:Nasdaq) up by over 60% during the same period.
Yet in the last two weeks, from about the beginning of February onward, investors and day traders alike have discovered that after the final blowout phase of a speculative binge comes the hangover, during which all you need to do to get poor is to repeat what you did to get rich: buy some stock and wait a few days.
Thus, from the two bookends of the Nasdaq electronic stock market -- the Nasdaq National Market, where stocks like Microsoft (MSFT:Nasdaq) and Dell are traded, and the junk equity subbasement known as the Over-the-Counter Bulletin Board -- come an unlikely pair of warnings to confirm the point: The reluctance of buyers to take a flier on either Dell or Madonna's undies. Suddenly, it has become a whole lot harder to sell both penny-stock junk and blue-chip tech stocks. For the time being, the get-rich-quick game is over.
For evidence, let us begin -- as many would doubtless prefer -- with an exploration of the secrets that lurk within Madonna's skivvies (though we may remark at this point, with some confidence, that we are hardly exploring virgin territory here). Our interest in the matter was aroused, so to speak, when a gossip columnist at the New York Post reported on Feb. 14 that anyone looking for a Valentine's Day gift of the sort that memories are said to be made of could do worse than check out a collectibles Web site known as WCollect.com (WCLT:OTC BB) -- on which site, as of that weekend, a pair of Ms. Ciccone's presumably much-coveted unmentionables would be put up for sale.
As you may imagine, not even speed bumps in the hallway could slow my headlong race toward the den to log on to www.wcollect.com and get up close and personal, in the digital way, with a pair of the underthings that are said to bring grown men (at least Japanese ones) to their knees. Alas, the sense of digitus interruptus was acute when, upon clicking breathless to the aforementioned Web site in pursuit of the famous panties, I wound up scouring the cyberlandscape from one end to the other without catching even a whiff of them.
As I rolled over to light a cigarette and stare limply at the ceiling, I began to wonder what this steamy tale of Madonna's missing underthings was actually all about. Would you believe an Internet stock hustle? That's certainly how the evidence shaped up after a day's worth of phone calls and records searches. The company says that it actually possesses a pair of Madonna's undies and will be posting them for auction on the site any minute. But who cares! What really lurks in this yarn is an all-too-familiar scheme: promote some doubtful penny-stock shares to the public by linking the company in press accounts to plans to launch a stop-the-music Web site, in this case, one devoted to the marketing of collectibles.
This time, unfortunately, the hustle fell flat. WCollect.com itself had all the earmarks of worthlessness -- though, in typical OTC Bulletin Board fashion, it was virtually impossible for investors to know the truth. That's because the facts concerning WCollect.com's ridiculous finances lay hidden behind the company's status as a "non-filing" penny stock.
Such non-filing penny stocks are created when companies launch offerings that seek to raise less than $1 million. In such cases, the companies do not need to file normal registration statements for initial public offerings that detail their finances, but simply list very rudimentary information, such as how many shares are being offered and what the company's business is.
Wcollect.com sprang full-blown to life as a publicly traded stock company on Feb. 16. That happened after a Vancouver businessman named Stewart Irvine merged his own privately held business -- a Nevada-based "art and collectibles" company, Mindcorp LLC -- into a Florida penny-stock shell named HPPP on Feb. 3. Thereafter, the company changed its name to Wcollect.com and began publicly trading on the OTC Bulletin Board on Feb. 16 at 4 5/64 per share.
Though Mindcorp itself had a total of less than $383,000 of capital on its books -- and HPPP had basically nothing at all -- the real value in the business lay in HPPP's public shares, which totaled 8.43 million. At 4 5/64 per share, that put a market value of $34.4 million on Wcollect.com, or nearly 90 times total capital. That's nearly as much as the wildly overpriced 140 times capital that eBay (EBAY:Nasdaq), the Internet auction site, is now selling for -- and eBay is actually making money.
Nonetheless day traders in the stock, who knew utterly nothing of the company's financials since virtually nothing about them was public, had clearly been looking for a bigger opening-day spurt than even that -- thanks in no small part to that gossip item about Madonna's undies in the New York Post the day before the stock opened for trading. Commented a day trader on the Internet's widely followed Silicon Investor message board on the eve of the stock's debut: "This little undiscovered auction could be a fun ride tomorrow if the New York media have stirred up some interest."
In fact, WCollect.com's debut proved a total flop, with the stock closing down on opening day at 3 15/16 on volume of 1.1 million shares -- after which investors instantly lost interest, with the result that the stock sagged further, to 3 1/2 per share, on day two. Best guess as to why? The Internet is already glutted with auction sites run by companies that publish actual financials. And with their stocks now tumbling -- UBid (UBID:Nasdaq) is down by 62% since before Christmas, while rival eBay is down 6% since Jan. 27 -- it was impossible to make the case for a bulletin board operation that couldn't even point to any financials at all.
At the opposite extreme we have a company -- Dell -- that boasts, by general agreement, some of the most impressive financials in history: a 44% average annual growth rate in revenue and a 51% growth rate in per-share earnings over the last five years. This is a company with $6.4 billion in current assets, $2.3 billion in working capital, nearly $2 billion in shareholder equity and only $512 million in long-term debt. Meanwhile, the business keeps throwing off roughly $500 million in operating cash flow every three months, along with $425 million in quarterly net income that seems to keep rising, with relentless regularity, by $40 million or so every three months. The company does this by selling its own Dell-brand personal computers through direct marketing via catalogs, 1-800 phone numbers and now the Internet-generating operating efficiencies that have made it the pace-setter for all of retailing.
Dell is, in a word, a terrific company, deservedly belonging in a rarefied class with Microsoft, Intel (INTC:Nasdaq) and just a handful of other Nasdaq companies. But like those others, Dell's stock price wound up getting lifted up and out of the earth's gravitational pull in the speculative tech stock boom that erupted in 1997 and has continued ever since. During 1997, the stock rose 206% in value. Yet in the 13 months since then, the pace has quickened to a 315% rise, with much of the increase coming in just the last two weeks of January, when Dell's stock surged 37% in value, to 108 per share.
Now Dell's price has begun returning to earth, as each new bit of news is pounced on by investors as a reason for taking profits rather than as an opportunity to buy more. Latest catalyst? First the rumors, and then the news, that although the company would meet Wall Street's quarterly earnings target of 31 cents per share for the November to January period, gross revenue would be slightly softer than expected -- a possible sign of broader weakness in the market.
Result? Wave after wave of selling, as the stock slipped 30% in value, from a high of 110 per share on Feb. 2 to an intraday low of 77 in the following 10 trading days. Day after day, the selling pace quickened, from 20 million shares traded on Feb. 3 to nearly six times as much on Feb. 17. Normally a selloff like that climaxes in a final panicky flushing out of negative sentiment in a stock, setting the stage for its next advance upward. But selling in this stock may not have climaxed yet.
Only a mere three months ago (Oct. 30, 1998), Dell was selling for 65 per share. At its Feb. 24 closing price of 83 1/4, that still represents a 28% gain in value in a single quarter, whereas earnings have risen by only 12% during the period. Adjust the price accordingly (by that 12% gain), and you're still looking at a stock worth somewhere around 72 per share, or a price-to-earnings multiple that's still 49 times Wall Street's consensus forecast of $1.47 in year-ahead earnings per share.
That would still give Dell a sharply higher multiple than its own growth would seem to justify, while still keeping it far ahead of the multiples now sported by Microsoft, Wal-Mart (WMT:NYSE), Home Depot (HD:NYSE), the Gap (GPS:NYSE) or any other leader in a consumer market. In other words, Dell can fall another 10 points -- and more like 20 -- before people can rightly begin calling it an underpriced stock, even by the standards of the very top echelon of the market ... let alone Madonna's underpants.
Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column.
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