Second last part of Barrons Article
Consider, too, the fact that K-Tel is not the most robust company financially. At the end of 1997, book value stood at $5.9 million. The company had $4.3 million in cash. Long-term debt totaled $4 million; the company has borrowed another $2 million on a $6 million line of credit. While K-Tel had sales in the December quarter of $23.2 million, up from $17.1 million a year earlier, profits fell to 11 cents a share, from 47 cents. Consider also the fact that K-Tel has tried twice in recent years to sell the bulk of its operations, and twice had deals fall through. Last September, an agreement to sell its "worldwide music business" assets for $35 million in cash to Platinum Entertainment Inc. collapsed; in early 1996, a similar fate befell an agreement to sell its "consumer entertainment business" to a group led by the then-president of the company for $25 million.
Asked about the runup in the company's shares, Corey Fischer, K-Tel's chief financial officer, responds that the stock market simply has applied the going rate for Internet commerce companies to K-Tel. Fischer contends K-Tel customers are a loyal bunch, and that when it comes to music, K-Tel is a trusted brand name. Well, maybe people who buy music compilations over the telephone late at night feel some loyalty to K-Tel, though we are not entirely sure the name will carry much weight when it comes to buying the Titanic soundtrack, or the next disk from Nine Inch Nails.
Be forewarned, too, that with the tiny public float, the stock will likely remain volatile for weeks to come. And the rhetoric has begun heating up. On Thursday, a Hurst, Texas, brokerage firm called Key West Securities snapped out a press release asserting that K-Tel is "severely overbought," and deserves to trade at $5-$7 a share. The next day, an Austin, Texas, outfit called Stock Investor Trading News whipped up a release of its own, calling the stock a "strong buy," and predicting K-Tel will top $100 a share. Key West, of course, is short the stock; the principals of Stock Investor Trading News, including a hedge-fund manager named Louis Riley, are long. And as for us, we're simply astonished.
Merrill Lynch last week picked up coverage of the four main players in the Internet navigation business -- Yahoo!, Excite, Infoseek and Lycos -- with positive comments that added some fuel to the Internet fire. Jonathan Cohen, who joined Merrill a few weeks ago from UBS, issued "3-1" ratings on Yahoo!, Excite and Infoseek, and a "2-1" rating on Lycos. In Merrill-speak, a "3-1" means neutral short-term, buy long-term. The slightly more bullish "2-1" translates to accumulate short-term, buy long-term. Cohen unveiled his first Merrill-paid writings on the stocks Tuesday morning. By the time the stocks closed for the day Tuesday afternoon, Excite had gained 7 1/8 to 76, Infoseek had improved 4 1/16 to 25 5/8, Lycos had ticked up 3 1/8 to 68 5/8 and Yahoo! had advanced 1 7/8 to 114 7/8. Not a bad day's work: In one trading session, the market cap of those four stocks combined had increased by $370 million. And the stocks had even bigger days on Wednesday and Thursday.
The interesting thing is, anyone moderately familiar with Cohen's work could have figured out what was coming. At UBS, where they use a similar rating system, but without the short-term, long-term feature, Cohen had neutral ratings on Yahoo!, Excite and Infoseek, and an accumulate rating on Lycos. His views didn't change; his employer changed. Nonetheless, the Street seemed relieved that Cohen, an independent sort who has been known to issue the odd sell recommendation on occasion, took a generally sunny stance on the stocks. So they all moved higher. Hmmm. Makes you wonder what else Cohen liked at UBS, doesn't it? Well, for one thing, he showed particular enthusiasm for America On-line, which at the moment is covered at Merrill Lynch by another analyst, who has the stock rated "3-1." Whether Cohen might take over AOL coverage, he declines to say. Cohen advises investors daring enough to try to value Internet stocks to throw out trendy measures like "page views" and "hits" and focus instead on revenues. After all, he notes, what matters is not just attracting eyeballs, but "the ability to monetize those traffic streams." At the moment, he notes, the four players in the search-engine group trade at between 10 and 40 times forward revenues. Cohen sees those valuations as a vote of confidence that over the long term, the companies can generate significant growth, and high-margin profitability. Imagine what will happen if they can't pull it off.
Several more quick examples of the current Internet mentality. Infoseek on Wednesday morning announced an agreement to acquire WebChat Broadcasting System, a "community site" featuring chat rooms and free home pages, for about 350,000 Infoseek shares, or about $6.7 million in Infoseek stock. By the close of trading Wednesday, Infoseek shares had gained 8 7/8 to 34 1/2. That increased the company's market cap by more than $240 million. On Thursday, the market cap rose another $264 million. They should do one of those deals every morning.
The same method works for small companies. ICC Technologies, a Hatboro, Pennsylvania, company that makes humidity-control systems, on Wednesday said it will buy Rare Medium Inc., a Web site development company, for $45 million in cash, stock and notes. ICC shares then soared 70%. On Friday, a little Internet services firm called HomeCom Communications announced a deal to buy an Internet Web hosting firm called Insurance Resource Center. HomeCom's stock doubled Friday. |
