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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Bald Man from Mars who wrote (7035)	4/15/1998 1:29:00 PM
From: Lazlo Pierce	Read Replies (1) \| Respond to of 18691

Interesting view from Herb G on thestreet.com ********************** Herb on TheStreet: Has Internet Insanity Gotten Too Wild for Its Own Good? By Herb Greenberg Senior Columnist 4/15/98 9:12 AM ET Last week Cramer justified the lofty valuation of Yahoo! (YHOO:Nasdaq) on the basis of management's fabulous execution. He said the stock is worth what the market is willing to pay for it -- period -- and he made it clear that he thought anyone who shorted the stock was betting against management, not the stock's value. It was, in typically eloquent and prolific Cramerese, a strong and compelling case. But it didn't answer the question whether Yahoo! was a good "buy'' at those levels (Cramer's too smart to cross that line.) And it didn't address what Yahoo! would have to do to justify its current valuation. (He was obviously thinking of it as a very long-term investment.) Somehow I can't believe the folks running Yahoo! are as thrilled as Cramer at the stock's valuation, even if they believe in the long term. Somehow I can't believe they're thrilled when they see the performance of their stock as the lead story on the front page -- not just the front of the biz section -- but the front page of the entire San Francisco Chronicle, as was the case last Friday. Somehow I can't believe they're thrilled to read one of their 27-year-old employees talking about how now he can not only go out and buy that home he's always wanted, but he can buy a Mercedes, as well. (It's the image it portrays.) When stocks rise as high, and as fast, as Yahoo!'s, the pressure on management to perform intensifies. So does the potential for disappointment. And what do analysts tell their clients on days like yesterday, when at one point Yahoo! traded as high as 118 before closing at 114 7/8? Lise Buyer of DMG Technology Group: "After last Thursday [when it was at 114 1/2] I was saying, 'Hey, if you bought this and want to hold this for the long term, there's upside.' But if they had been an investor for some time, I told them they might think about redeploying the money elsewhere.'' In other words, selling Yahoo! and buying something else. Buyer, who joined DMG from T. Rowe Price, hasn't forgotten her roots as a value investor. Her worry is that "we've seen aggressive run-ups in groups before. Look how money poured into Clarify (CLFY:Nasdaq), Vantive (VNTV:Nasdaq), Scopus (SCOP:Nasdaq), Remedy (RMDY:Nasdaq) and other help-desk companies. The market collectively loved the group. Well, Vantive has held onto its value quite well. Others have had their ups and downs.'' As it applies to the Internet stocks: "Bigger investors who are not able to move quickly are welcome to stay in. But smaller investors, who can move more quickly, might want to remember that bulls make money, bears make money and pigs get slaughtered. There are just too many examples of groups that go through the roof, only to come back down.'' With this in mind, yesterday she did some calculations on how Yahoo!, Excite (XCIT:Nasdaq) and Amazon.com (AMZN:Nasdaq) would have to perform to justify buying them at their current prices. With Yahoo!, she assumed an annual return of 20%, which is conservative for a company with so much risk. At that rate, the stock would rise to 200 by 2001 -- just three years from now. "Now let's say Yahoo! is as dominant in its space as Microsoft (MSFT:Nasdaq) is in its." (She realizes that they're like night and day as companies, but she's just trying to be fair.) "So, I put a 45 multiple on Yahoo!'s earnings. A stock price of 200 means the company has to earn $4.15 in 2001. Now, for argument's sake, assume the share count doesn't grow much between now and then, so they have 60 million shares. That implies net income of $265 million. If it's taxed at 38%, the operating income would be $430 million. That's a 40% operating margin (like Microsoft). That means they'd have to do $1 billion in revenues in 2001. That would mean a 93% compounded annual growth rate. That's not impossible, but it's not the most likely scenario. "And those are a far cry from what management has been saying.'' Meanwhile, her calculations for Excite and Amazon yielded only slightly better results. One other point: Excite's stock was up 10% yesterday, to 76, but Intuit's (INTU:Nasdaq) stock was flat. Investors were obviously preparing for Excite's earnings release today. Just one problem: Intuit owns 15% of Excite. If Excite was rising because smart, informed money expected good news, shouldn't Intuit's stock have been rising in lockstep? You would think so, which is why Buyer is wondering whether the latest round of Internet insanity was caused by small investors who feared they'd miss out on the big jackpot. At these levels, if they're pondering a purchase, she figures maybe they'd probably do just as well at the slots.