Speaking of things people whack, here's the Fool view of stocks as futures contracts, not a bad way to view it: "Are Stocks Glorified Commodities?
By Bill Mann (TMF Otter)
April 7, 2000
I saw an interesting article in USA Today yesterday that plotted some
coincidental movements between certain crop future prices in the past and the
performance of some of the big growth companies and commodities. For
example, the recent market performance of JDS Uniphase (Nasdaq: JDSU) is
supposed to mimic the performance of soybean futures when they peaked in
1997, or Rambus (Nasdaq: RMBS) mimics lumber contracts from 1999, and
some others resemble other futures pricing trends with remarkable accuracy.
The end result for each company, if the history of the futures contracts they
are purported to match is any indication, will be trouble, as these speculative
binges ended with the commodity prices skyrocketing and then sinking back to
the point near where they started, following a four month contraction in price.
Sure, OK. This strikes me as data mining at its absolute worst, technical
analysis looking for immutable patterns from the past. A hint: there aren't any.
But the speculative froth that has come up over these and other momentum
stocks is undeniable, and as such there are some similarities about how
"investors" look at the momentum stocks and the way speculators bid on
futures.
The Motley Fool takes criticism from some sides for ignoring options as viable
ways to invest in the market. I'd suggest that many of the companies that we
cover, many of the biggest growth stories from the last two years, are futures
contracts in and of themselves.
You want to discuss put or call options on Qualcomm (Nasdaq: QCOM) ?
Qualcomm itself may be priced like a commodity, priced not on company
financial fundamentals, but on potential. It goes like this: Qualcomm is priced at
348 times earnings, but the basis of buying Qualcomm for some is a future
contract on the potential for domination by CDMA technology, key patents for
which are held by the company. If China announces they're going to adopt
CDMA wireless standards, Qualcomm skyrockets. If they choose something
else, it drops. To determine which reason you hold this stock, ask yourself this
question: Do you intend to hold Qualcomm for the decade or so until it either
fulfills its promise or fails? If not, you're playing Qualcomm as a momentum
stock, if so, you're investing in it.
Futures work the same way as I have described above. Let's say you believe
that the price of Frozen Concentrated Orange Juice (with all due respect to
Trading Places) is going to go up, due to weather conditions, demand curves,
and so on. You could take a contract on OJ Futures maturing in three months.
The majority of people who deal in futures contracts are never expecting to
actually take delivery of the goods, they're hoping to sell the contracts
sometime prior to maturity at a higher price.
In the same way, speculative runs on stocks are somewhat (or in some cases,
totally) disconnected with the actual underlying business. Instead, they are
caused in part by traders' belief that they will be able to make money on the
direction of the stock price. This rationale goes a long way in helping me get
my head around why a company like eBay (Nasdaq: EBAY) can go from $8 to
$234 in six months, then back down to $70, then back up to $255, and once
again back down again in the course of another year. There is a certain subset
of investors who are treating these companies the same way they do futures,
without having any intention to be around when the time comes for the
company to deliver on its promise. There is no explanation based on company
fundamentals that would convince me that these price movements were, even
in hindsight, reflective of the underlying fundamentals for eBay.
I've wondered aloud in this space before how people can invest in companies
with massive valuations when they have no revenues, or even assets. If this
hypothesis holds water, the answer would be that people are not buying the
companies -- no cash flow analysis would possibly support this -- but rather
they are buying contracts on the potential that other people will covet the
shares at a later point at a higher price.
If this is in fact the case, it provides all the more impetus for Foolish investors
not to get caught up in the day-to-day of stock price movement. As with
futures, speculative stock investing can amplify small changes in potential
outcome into huge price swings.
E-nough is E-nough.com
A polite E-request and a recommendation to entrepreneurs entering into the
information technology and Internet sectors. Call it "Advice from M2U." It is no
longer clever to just add the letters "e," "i," or ".com" to a word to convey the
business of the company. Investors have seen so many iTurfs, eLotterys, and
drkoop.coms that these appellations are no longer E-quated with guaranteed
appreciation and success.
What's more, they don't really describe very much. If I want to find a company
on the Internet, the first thing I'm going to do is add ".com" to the end of the
name. The ".com," then, is redundant. It describes nothing, and unless the
word sitting in front of it is "amazon," it doesn't even represent anything all
that earth-shattering anymore.
So, you're selling goats on the Internet? Are you a B2B vertically integrated
Internet-enabled marketer of cleft-hoof garbage and grass-eating applications?
Please don't be. That doesn't tell us anything. And please don't be eGoats,
iGoats, goats.com, GoatNet, or even Clik2Goat -- they're just going to get
lost in the shuffle of all of the other similarly named companies. You're an
entrepreneur, and you're creative. You can do better.
Oh, and anyone who, in spite of my cyberequest (another no-no), still wants to
name your goat providing service any of the above, just come ask me -- I've
cybersquatted the URLs.
Momentum Stocks
Although I am no big fan of taking a snapshot, short-term window and declaring
it a trend, particularly on the tail of a week of such volatility, I did notice that
many of the companies that have grown so spectacularly over the last 2 years
or so are down significantly year-to-date. While I'm not going to belabor the
point on this, I did find it interesting that those people who piled in late on
some of the most cited "new-economy" stocks find themselves significantly
underwater so far this year. Some, but not all:
AOL (NYSE: AOL) -11%
Yahoo (Nasdaq: YHOO) -33%
Amazon.com (Nasdaq: AMZN) -12%
Internet Capital Group (Nasdaq: ICGE) -58%
CMGi (Nasdaq: CMGI) -47%
Qualcomm (Nasdaq: QCOM) -17%
Commerce One (Nasdaq: CMRC) -36%
VerticalNet (Nasdaq: VERT) -50%
eBay (Nasdaq: EBAY) 35%
Echelon (Nasdaq: ELON) 325%
JDS Uniphase (Nasdaq: JDSU) 48%
Some of these returns should make those who "missed the run on tech" late
last year feel vindicated. But not so fast. These numbers, in most cases, do
not go very far in erasing the huge gains these companies have enjoyed. Plus,
any three month period, unless something really dramatic has happened, such
as the AOL/Time Warner merger, is not a sufficient period of time to evaluate
share performance. That is, unless you're a day trader or a speculator, in which
case, best of luck to you.
Fiat, Fool!
Bill Mann, TMFOtter on the Fool Message Boards
"http://www.fool.com/news/foth/foth.htm |
