 Good
Seats Still Available
Chris Mayer
The
Daily Reckoning
November 8, 2004
"The Daily
Reckoning PRESENTS: The market is still crazy in many respects,
but Chris Mayer assures us that opportunities remain...
In 1903, Henry
Ford built a racecar. He did this after he left the Detroit Automobile
Company, to pursue his idea of going into business himself. He
built a racecar because he needed capital and this was the way
to raise it - build a racecar, win some races and get some attention.
After he built
it, he sought a driver brave enough and strong enough (the car
was steered with a tiller, not a wheel) to race it. Ford hired
a professional bicycle rider named Barney Oldfield and spent
a week teaching him how to drive this new, powerful (but unreliable)
racecar.
Before the
race, Oldfield uttered what must be one of the most memorable
lines in all of racing history. He said, "Well, this chariot
may kill me, but they will say afterward that I was going like
hell when she took me over the bank."
Fortunately
for Oldfield, Ford's new chariot did not kill him and he went
on to win the race. Ford got the attention he needed, raised
the capital he required and the rest, as they say, was history.
In my opinion,
today's investors have something in common with Oldfield's spirit.
With some of today's high-flying stocks, I doubt investors will
come out of it as well as old Barney Oldfield did. No, these
stocks are going to take investors over that bank.
If you think
the tech bubble popped in 2000, I urge you to take another look.
America's love affair with racy concepts, phony values and paper
pseudo-wealth continues unabated. The flair for risk-taking is
still alive and well. Investors are still smitten with New Economy
thinking.
Reading a little
of veteran tech watcher Fred Hickey's analysis a few days before
Halloween was like reliving a horror show. I kept thinking, "Not
again! Didn't we just go through this not too long ago? Didn't
pie-in-the-sky tech investing get smacked once already?"
"One would
have thought that such a shellacking would have ended the irrational
love affair for tech and Internet stocks," Hickey writes.
"But here we are, almost four and-a-half years from the
bubble's bursting in March 2000, and we are still waiting for
a return to a sane investing environment."
Consider just
a couple of these tech marvels...
Hickey comments
on Travelzoo. Who knows what Travelzoo is all about, but Hickey
notes that at a price of $75, the stock was being valued at $1.2
billion, which was 50 times its sales of $23 million. 50 times
sales! That value was so out of whack, that when the company
had to raise some money with a secondary offering, private investors
paid $40 per share - a 47% discount to what investors in the
open market had paid.
Or consider
Google, selling for about 186 times earnings, and up about 60%
from its IPO. Better yet, just look at the whole NASDAQ itself.
Hickey notes that the NASDAQ as a whole is trading for 57 times
earnings and nine times sales.
Will Rogers
once remarked, "The short memories of the American voter
is what keeps our politicians in office." Well, we can say
that the short memory of the American investor is what keeps
these stock prices where they are.
Have investors
forgotten the devastating losses that such craziness can lead
to? Have they forgotten about the 95% losses on stocks like CMGI,
JDS Uniphase, Sycamore Networks and all the rest of the last
batch of stocks to carry these kinds of absurd valuations? Have
they forgotten that the NASDAQ lost 2/3 of its value in two and-a-half
years after starting with such nosebleed valuations?
"Often
I sit in my office and I cannot believe what I'm seeing,"
writes Hickey with exasperation. "The lunacy does not seem
to end."
What we are
witnessing may be like some sort of Indian summer, a little warmth
in the midst of a bearish winter. It's like a weigh station to
a new, more normal value. What that normal value might be, is
anybody's guess.
Famed contrarian
Jeremy Grantham, whose firm, GMO, manages billions worldwide,
puts a more normal value for the S&P 500 about 35% less than
what it is today. He writes, "A normal profit margin combined
with a normalized or trend line p/e of 16 unfortunately produces
for the S&P 500 a fair value of 725, which compares painfully
to the S&P's current price of just over 1100."
Unfortunately
(or fortunately, depending on your perspective), the normal market
is the one that never happens, as markets tend to overshoot,
and a bear market could take us below that reasonable projection.
Having laid
out that gloomy scenario, I still think there are opportunities
in today's markets. Believe it or not, bubbles such as these
often create opportunities in other neglected areas of the market.
It's like a movie theater where everyone piles in one theater,
leaving good seats still available in the other theaters.
These problems
are self-correcting. In other words, when one theater gets a
bit too crowded, people start looking for someplace else to go.
The excessive
valuations in tech-land are also self-correcting as new competitors
start to come in looking for a piece of that money. Think of
it this way, to borrow from Edward Chancellor, if it costs one
dollar to dig a hole that is priced for ten dollars in the market,
the temptation to reach for a shovel becomes irresistible.
New issues,
new technologies, and new competitors will try to cash in on
those stratospheric valuations. They are going to find it progressively
more difficult to find buyers. More and more investors are going
to start looking for someplace else to go.
During the
next leg down, the intangibles of technology - the supposed "story
stocks" and their great promise - will be outdone, once
again, by solid tangible assets that actually deliver real cash
flows. You have to be very selective and do some digging, but
these companies do exist.
When the market
comes crashing down, the hideaways will be in these kinds of
companies, where the stock market price is a convenience, not
the sole purpose of a business plan.
Regards,
Chris Mayer
for
The
Daily Reckoning
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