To: Harold S. who wrote (5725 ) 11/10/1997 3:02:00 PM From: Brent D. Beal Respond to
Understanding AOL: A number of people have commented on the fact that AOL has displayed a unique trading pattern. Here is my take--This stock has risen steadily over the past year and AOL longs have learned to buy the dips by repeatedly watching the stock recover from short-term drops in the stock price to make new highs. In the case of AOL, this learning has taken place in a context in which fundamental data, everything except the mighty subscriber count, has been almost completely ignored. Other stocks like Dell, for example, behave differently to a certain degree because longs have learned to expect earnings surprises, growth and other factors related to the fundamental position of the company. Therefore, Dell is susceptible to data on the macro economy, the behavior of competitors, currency problems, etc. Since AOL longs are unencumbered by any link to reality, AOL just doesn't react to the same news, hence the "strength" of the stock when everything else is headed south. It will take some time for AOL longs, institutions included, to un-learn the buy-on-dips mentality and realize the shift that is taking place in the marketplace with regard to how AOL is valued. Concensus is now that AOL is overvalued and has gotten ahead of itself, implying that investors are beginning to focus on earnings and other fundamentals. As this continues to happen, the price will continue to drop, with the ocassional spurts of "bigger idiots" still buying the dips. The process will be a painful game of give-and-take as the stock slides, unless there is some obvious change in the number of all numbers, the subscriber count, which I don't expect, since AOL makes this number up.
