What is a fair valuation of NN?
Don't answer. Just read the following:
TA
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interactive.wsj.com
Barron's, DECEMBER 13, 1999
Alan Abelson's Editorial.
( This week, Rhonda Bremmer ).
Loss Leaders
By Rhonda Brammer
Mania.
Who said mania? Bite your tongue. What you recklessly
dub as mania is simply the marvel of New Age investing.
No argument that VA Linux Systems had a nice little pop
on its first day of trading. Offered at $30, the shares closed
Thursday at $239. In the process, the firm was endowed
with a stock-market value of nearly $10 billion. Roughly
equivalent to that of Southwest Airlines, Ralston Purina or
Deere.
And, we say, a very fair valuation.
Predictably, Luddite investors trapped in the Old Era (or is
it Old Error?) howled that it was absurd and probably
immoral to place so rich a value on a company that over
the past year, on revenues of $30 million (yes, that's
million), managed to lose $24 million. Nothing proprietary
either, they cried, in peddling Linux-based computers.
Giants like IBM, Dell -- you name 'em -- already sell them.
In its parabolic rise, VA Linux is merely following in the
moonbeam of Red Hat, a distributor of the free operating
system called Linux. Red Hat, too, is losing money. Its
shares, which came public in August at $14, closed Friday
at $273.
Both dramatically illustrate that to outperform an index --
and we mean to bury the Dow, say, or the S&P -- investors
must pay heed to the wisdom of Salomon Smith Barney
strategist L. Keith Mullins and buy shares of those
companies, and only those companies, that are losing
money.
Losses are what count. Losses, not earnings, are the new
yardstick of value.
The beauty of the likes of Red Hat and VA Linux is that you
count on them to show losses from here to infinity -- which
is why their stocks deserve infinite multiples.
After all, as the fervid fans of Linux have boasted for
years, the whole idea of its free software is to remove
Microsoft-style profits from the operating-systems business
forever.
Minuscule revenues and generous portions of red ink no
doubt also explain the remarkable rocket launch of
FreeMarkets on Friday, which was priced at $48 (original
estimate: $14-$16), opened at $248 and, last we looked,
was trading at $290, flashing a market cap of $9.8 billion.
It's not mania -- it's manna.
Pity the poor investor who owns an S&P 500 Index fund.
While an index like the Nasdaq 100 has blitzed ahead
70%-plus so far this year, the S&P is up a ho-hum 15%.
The problem is that the S&P folks have strived mightily to,
in their own words, "add companies to the Index that are
relatively stable and will keep turnover low."
So, in years past, they've loaded up on companies that
produce such prehistoric stuff as chemicals, oil, minerals
-- or that sell mundane things like insurance and
underwear.
Lately, though, S&P has seen the light. In place of
TransAmerica, it gives the world Qualcomm; Nalco
Chemical is replaced by ADC Telecommunications;
Asarco by Comverse Technology; Mobil by Citrix
Systems; and Fruit of the Loom is shed for Adaptec.
The greatest coup for the postmodern index revisionists
came last week when stodgy old Laidlaw, operator of
school buses and Greyhound lines, was dumped in favor of
the Internet bellwether, Yahoo.
Already up 68 points in the five previous sessions, on
Tuesday, just prior to its entry into the 500, Yahoo jumped
another 67 points, gaining 24% in a day! Some 66 million
shares, or roughly two-thirds its entire float, changed
hands.
Alan Newman, a saavy technical analyst and editor of HD
Brous & Co.'s Crosscurrents, points out that in one session,
Yahoo traded a dollar amount equal to 86% of the day's
total GDP. Next week, 100%?
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