The 24 Riskiest Stocks - Ten Months Later
06-Feb-01 09:21 ET
[BRIEFING.COM - Robert V. Green] Just about ten months ago, on March 30, 2000, we ran a story called "The 24 Riskiest Stocks." These were stocks with extremely high price/sales ratio. Just as the market started to get bumpy, these were the stocks with the highest degree of overvaluation built into them. Here's an update on where they are today, and the lessons learned.
The Original 24 Riskiest Stocks
We picked the 24 stocks with the highest price/sales ratios on March 30, the end of Q1, 2000. These two dozen stocks were extremely overvalued, as time has shown. Here is a list of the original articles. Click on the titles to read the original stories.
March 30, 2000: The 24 Riskiest Stocks
April 4, 2000: The 24 Riskiest Stocks: What Now?
April 26, 2000: The 24 Riskiest Stocks: Update
All were chosen solely because they had the highest price/sales ratios in the marketplace.
Why They Were Risky
A high price/sales ratio implies high revenue growth curves. Any failure of a stock to live up to a high price/sales ratio, by lower than expected revenue numbers, even just once, can cause a drastic reevaluation of the company's long term prospects.
But a high price/sales ratio also implies that there is a lot of room for "pricing" in the stock. This is "market risk." Companies are valued primarily on their earnings, and then on their revenue stream. A rapidly growing revenue curve implies that the company will be much bigger eventually
These two dozen stocks were loaded with both market risk and company risk.
What Happened To Them
Here's a chart of what happened to the stocks with these extreme price/sales ratio.
Company Symbol Price/Sales on March 30 Market Cap (MM) on March 30, 2000 Market Cap (MM) on February 5, 2001 Price on March 30, 2000 Price on February 5, 2001
Infospace INSP 435 16,067 1,339 65 1/8 4 1/4
Juniper Networks JNPR 290 47,695 33,264 137 1/2 104 3/4
Ariba ARBA 270 24,244 8,165 110 32 11/16
Metromedia Fiber Network MFNX 268 27,309 7,678 45 7/32 13 15/16
Verisign VRSN 235 19,456 13,832 152 70 1/16
Inktomi INKT 218 22,287 1,764 178 3/8 13 7/8
Rambus RMBS 181 7,666 4,443 198 3/16 45 1/2
Next Level Comm. NXTV 179 11,279 949 120 3/8 11 5/16
Yahoo! YHOO 175 102,663 19,580 169 5/16 35 1/16
Redback Networks RBAK 159 12,780 6,769 70 7/8 44 1/4
Brocade Comm BRCD 148 18,217 18,895 80 5/16 84 3/8
Software.com SWCM 145 6,163 *
Tibco Software TIBX 143 20,445 7,340 87 1/2 37 3/4
BroadVision BVSN 140 15,118 3,415 51 12 11/16
eBay EBAY 132 28,947 12,507 104 46 11/16
Digex DIGX 132 10,696 1,545 116 24 11/64
Foundry Networks FDRY 127 17,340 2,236 126 19
PMC-Sierra PMCS 124 30,043 11,319 173 1/4 69 3/4
Applied MicroCircuits AMCC 120 16,877 19,033 78 64 3/8
Vignette VIGN 113 12,843 1,672 59 5/16 7 3/32
Exodus EXDS 112 27,655 8,010 72 18 3/4
Globespan GSPN 112 7,176 2,400 110 33 1/2
Gemstar Intl. GMST 105 18,302 20,426 80 49 13/16
Research In Motion RIMM 105 8,128 4,480 99 1/2 62 5/8
Merged with Phone.com, renamed Openwave (OPWV)
The total amount of market capitalization lost in these 24 companies over the last 10 months exceeds $435 Billion. That's about equivalent to General Electric disappearing.
Some estimates have placed the total amount of lost market capitalization in 2000 at $1.5 trillion. What this means is clear:
These two dozen stocks alone accounted for nearly one-third of the market capitalization lost.
And that doesn't even count the money lost before our March 30, 2000 story. Many of the stocks above were already down 50% at that time.
But the even more remarkable story is that most of these companies increased their revenues during the past ten months. The rate of increase may have been lower than expected in March, 2000, but for the most part, these companies didn't suffer economic collapse or financial ruin.
The market just became unwilling to pay high prices to own them. Once you've sold to every price-insensitive buyer, who is left?
The Lesson
It is easy to focus on the collapse of the dot-coms last year, because those companies got a lot of publicity. But the full story, in dollar terms, is the adjustment of valuations on tech stocks with legitimate, profitable business models. That's where the real money disappeared.
When we first ran this story, we tried to point out the latent risk in the stocks. We got a lot of email at the time from stockholders in those companies, along the lines of "You don't understand; these are great companies." And many were, and still are. But how the market values a stock is just as important as how well the company's business is proceeding.
The dramatic lesson of the 24 stocks can be boiled down to the following points:
A stock down 50% doesn't mean it is a bargain. Most of the stocks above were already down 33% to 50% before the March 30 story.
Market risk can be extreme. It is separate from company risk. You need to measure market risk as well as business risk.
Owning stock in a good business does not guarantee that the stock price will rise, or that you will be protected from market risk.
Some of these lessons have been learned the hard way, by stockholders of the above companies. If you are able to learn these lessons vicariously, by watching someone else lose money, consider yourself fortunate.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com |
