From Motley Fool:
>>The other day, I wrote a Fool Plate Special column on the speculative juices that are flowing in the market. Though I
mentioned "1995" in the title, probably because I was thinking of the unreal pop Netscape (Nasdaq:NSCP - news) made
in its first day of public trading that year, I was really thinking more of 1996. Netscape was really a seminal event leading
up to 1996, as it was the first company basing its business model primarily on the Internet to make a big IPO splash.
1996 was a rarer phenomenon, though. No one can say that Netscape was a horrible company without a real business,
unlike what one can say about some of the companies that were being traded in the spring 1996 mania. "Mania" is a term
used very casually by some to describe the valuations on super-high quality companies such as Coca-Cola (NYSE:KO -
news) , but it would have to get to a market cap of a couple of trillion dollars to trade at the same insane valuations at which
some of the dreck that is trading this week is valued. At least with Coke, you'd only face the prospect of losing 90% of
your money if you bought at 100 times revenues and liquidated the position some years later. With some of the today's
South Sea Bubble descendants, you have a chance of eventually losing your entire investment.
Such is the fate of investors who buy into the ridiculous notion of "buy low, sell high" or the terrific "get in on the ground
floor," as if you have to get in on the ground floor to do terrifically in equity investments. To do well buying high and never
selling, or hopefully selling at much higher prices down the road, one can buy medium quality to good to excellent to
world-class companies. Buying low-quality companies is a sure way to generate bottom-of-the barrel results. In fact,
buying the sort of things that are moving today can actually be destructive to one's long-term success, because if you
bought hoping the next sucker would bail you out or you bought without looking at the fundamentals just because it was
going up, the positive reinforcement from today's action will keep you coming back to very low-quality stocks. Such is the
nature of random positive reinforcement. Like a rat tapping a lever to receive the pellets that are delivered at only random
intervals, market participants buying into some of the stocks below are acting out a real-time replay of these famous
experiments in animal behavior.
Here's a list of some of the stocks in today's run-up, in no particular order and with no specific comment on each, just yet.
Some of these might be fine companies, but market participants and traders running these things to the moon because of any
connection, however tenuous, to the Internet, creates a good deal of danger for those not paying close attention to what
they're doing.
7th Level (Nasdaq:SEVL - news) up $7 7/16 at $9 1/4
K-tel (Nasdaq:KTEL - news) up $2 1/4 at $43 7/8
Homecom Communications (Nasdaq:HCOM - news) up $5 7/16 to $11 15/16
Red Brick Systems (Nasdaq:REDB - news) up $2 1/2 to $7 5/8
Cybershop International (Nasdaq:CYSP - news) up $4 5/8 to $16 1/2
Telescan Inc. (Nasdaq:TSCN - news) up $3 1/16 at $9 7/8
Peapod Inc. (Nasdaq:PPOD - news) up $1 1/4 at $9 3/16
Online System Services (Nasdaq:WEBB - news) up $2 7/16 to $14 5/16
Data Broadcasting (Nasdaq:DBCC - news) up $2 9/16 to $8 3/4
Rocky Mountain Internet (Nasdaq:RMII - news) up $2 3/16 to $10 1/4
ODS Networks (Nasdaq:ODSI - news) up $2 at $7 3/4
Audio Book Club (AMEX:KLB - news) up $5 7/16 at $11
DBT Online (NYSE:DBT - news) up $4 3/16 at $26 15/16
PC Quote (AMEX:PQT - news) up $2 7/8 to $4 3/8
Sharper Image (Nasdaq:SHRP - news) up $3 11/16 to $8
There were a few others that didn't quite make it here. ICC Technologies (Nasdaq:ICGN - news) , a manufacturer of
climate control systems, is pulling a Diana Corp. in deciding to diversify by acquiring "Internet services business" Rare
Medium. Diana Corp. was the meat and seafood distributor, Georgia's largest, that decided to get into the data switching
business. Its stock experienced regular doublings in 1996 before tumbling off the New York Stock Exchange. It now trades
as Coyote Network Systems Inc. in the pink sheets. Sure, ICC shouldn't be ridiculed for allocating capital to a growing
industry, but with its stock trading at nearly three times its week-ago level, the investors were quite quick to add $85 million
to its market cap in light of the fact that the deal could have been largely stock-financed, meaning the added market cap was
larger than just $85 million with new shares thrown in there. Add the uncertainty of a humidifier company's executives
getting into a totally different line of business where the real talent could bolt as soon as any golden handcuffs expire, and
this week's move was a heady one.
There are other reminders of those scary days of spring 1996. Net.Radio company Navarre Corp. (Nasdaq:NAVR -
news) surged $3 1/8 to $9 1/2 today on no news, reminiscent of its 1996 round trip from the low single-digits by way of
detour to its May high of $18 5/16. The explosive move in shares of music distributor K-tel (Nasdaq:KTEL - news) over
the last week, from below $10 to today's close of $43 7/8 is similarly bizarre and calls to mind the 1995 run-up in the share
of Zenith (NYSE:ZE - news) on cable modem hype.
Like Zenith, K-tel is a company that everyone remembers, which some take to mean that there is a vibrant brand name to
lend credence to the story. Maybe so, but to hear from an analyst initiating coverage of K-tel with a "strong buy" rating
because of its successful history of music retailing, I would just point investors to K-tel's stock chart. Outside of this
week's manic run-up, the company has built zero shareholder value since starting to trade as K-tel in 1993. The Internet
doesn't build the market for music. It may expand it for that marginal buyer who doesn't order things over the telephone or
who is an impulsive buyer while sitting at the computer, but it's not a whole new world out there. K-tel is far behind the
curve and already operates in a medium where advertising costs are a fraction of what the Internet advertising costs and
where operating costs per order -- for a person sitting at a phone with an X-terminal computer -- are lower than putting in
Alpha servers, running a T-3, and paying out the ying yang for exclusive marketing agreements.
Shopping.com (Nasdaq:IBUY - news) is another interestin g example of a stock that harkens back to 1996 or even to the
Go-Go late '60s. Gerry Tsai would love this one. It had $376,822 in revenues and $2.4 million in losses through nine
months of 1997, very little general consumer recognition, a non-focused website, and a market cap of $73 million. Anyone
remember International Automated Systems (Nasdaq:IAUS - news) ? This was the company that said its modem
would get 1.2 gigabits per second over a normal phone line. "Investors" actually bought it. Shopping.com looks similarly
dubious from a longer view, but that might not be the company's fault. It's the fault of either shorts getting squeezed or
anyone buying into concepts with zero regard for value.
Now, I might have painted some great companies with one brush in the above column, but on a day like today, watching
unknown companies double and triple just because they're involved in the Internet, makes me want to retch. Not because
some trader is going to lose his shirt or win someone else's and not because some housewife that gets a kick out of
day-trading (you see this sort of thing on the data services commercials on CNBC) will lose her daugher's college money
because the market metes out random, positive reinforcement of speculative mindless trading. There is nada I can do about
that. I retch because I actually rail against this sort of behavior like I'm some sort of freaking Alan Abelson railing against
the new era. If I were to say I care about people blowing their retirement because they were stupid, I would be seen as
disingenuous.
I also retch because I know -- I KNOW -- what the outcome of most of these companies will be. Most will eventually sink
back into obscurity and lose people money. That's because the great majority of companies are mediocre, a small minority
stink, and a smaller minority are great. A tiny fraction is world-class. Most of these companies are overvalued on current
fundamentals, have overinflated growth expectations built in, and are priced beyond intrinsic value even if the market is
there for them to grow. If you're in some of these and bought because they put out a press release mentioning they're doing
business on the Internet, good luck. << |
