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Starting 1999, SFEs whole market value was less than $900M. Of that, the private investments were valued at around $175M. Now, just 4 1/2 mo. later, the market is placing a value of $2.1B. on the private investments alone. Up until now, it hasn't mattered what value the market was placing on them, because the majority of new players either didn't truly know, didn't care, or or both. Nothing wrong with riding that wave, in fact it was great. Much of net investing is just just hyper-momentum based or to put it more crudely, greater fool theory in overdrive. There is no way the majority of net investments can be justified by the earnings they will produce for the next decade. More fun ahead? Cracks started appearing recently and it could have implications for SFEs stock price of which the majority of the $60 premium over NAV is Net based. Recently the gap between value and growth had gotten to historic extremes. In April the tide began to turn. In the past two weeks, value has outperformed growth by almost 5%. Is this just a flash in the pan? I think not. The value is with "value" vs. growth as never before, and value is underowned vs. growth. As the momentum has started to shift, that recognition draws more funds that have to stay with the momentum and quickly acquire some value component. This will further the out-performance and draw in more money and momentum. If correct, what does this portend for the ultimate growths, the internets, with valuations off the charts? As they are mostly owned by individuals, those individuals are not likely to quickly abandon what has worked. At the margin, there will be funds pulled out and re-allocated to value. [Note, several posts in the past week, right here, have indicated that process has already begun.] This lessening of demand combined with the increasing supply that is occurring [new 'Net IPOs daily] could present a behavior in 'Net stocks that is a break from the last 6 mo. What very well could happen now is a trading range, where there will be vicious corrections and equally stunning rallies, but, as the two sides are more evenly matched, there are precious few upside breakouts that lead to the big gains investors have gotten used to. Many of the smaller 'net stocks are well down from their highs, and will not exceed them for years. One can only speculate what this will mean for SFE. Given the valuation shift outlined at the beginning, there may be not much room for error, not on the part of Safeguard itself, but in the psychology towards the internets which is primarily what SFEs $2.1B premium [and $83 price] is all about. I am very impressed by what the company is doing [reading the annual report almost makes one misty eyed, as their desire to enhance shareholder value is their primary focus and uppermost measure of success as a company]. The problem is valuation, and in the next few months, it may matter. This is not a prediction of doom and gloom, but as one who has been generally superbullish or bullish from $3.25 in '93, 17$ in '96, and $27 Jan. '99, I now believe it is a time for greater caution. Have core position, and will continue to trade the technicals, which short term are currently mixed. It is all about reward/risk, and that is now shifting toward value. Value without movement is worth nothing, but the technical picture is looking very positive with solid accumulation in the newly emerging value stocks. It might not pay to be late to this party, because most value stocks are not going to go from a 16 pe to a 50 pe. They just can't go up 4X or 5X in a few months like Nets have done. I have mentioned ABX, which Mon. will go up or down depending on a Swiss referendum voted on Sun. to sell gold. Have not heard results yet. The other stock mentioned was Borders Group. BGP $17 [bookseller: 900 Waldenbook stores, 250 Borders stores]. Revenue $2.6B. '99 engs. [Jan '00 FY.] expected $1.24 eps., next year, $1.43 ep.s. Market Cap. $1.3B. Compared to Amazon.com, '00 loss -$.29 ps. Market cap. $30.6 B. Yes, you can buy 23 1/2 Borders lock, stock, and barrel for the price of 1 Amzn. Something amiss? Technical action, breaking out. Have a good week. Mike |
