This week I’d like to coddiwomple through making mistakes and staying data-dependent to gain a...
Don't Try to Catch a Falling Battle Ax
09/19/2012 8:00 am EST
The lesson the Facebook debacle should have taught investors by now is twofold: Don't buy into the hype, and don't think bottom fishing is easy. When analyst can't figure out a stock's valuation, investors will always be in for trouble, writes Jon Lewis of The Daily Profit.
I saw an article yesterday from a supposed “valuation guru” (he’s a professor who wrote a book on investment valuation) who said he would buy Facebook at $18. OK, fair enough.
But this “expert” (remember, he wrote a book) also said that Facebook’s IPO was fairly priced at $38 in mid-May. In fact, he called it “a Goldilocks IPO.”
But a week later, he lowered his valuation to $29 per share. And earlier this week he dropped it again to $23.94 and proclaimed he was a buyer at $18. That’s a lot of switching in just three months. And remember, this guy wrote a book.
It reminds me of the old Robin Williams routine about Muammar Gaddafi: "This is the line of death. You cross it, you die...OK, you cross this line, you die...OK, you cross this line, you die...This line, you die...OK, you're knocking on my door, I'm not coming out. Naaaaah."
My point is not to quibble with these lowered estimates. Hey, everyone is entitled to change their mind. That’s what makes the markets so fascinating, if not maddening.
My point is, why would anyone, beyond pure speculators and/or thrill-seekers, step in to buy Facebook now? For that matter, why would anyone short Facebook right now?
Peter Lynch, the legendary Fidelity mutual fund manager, used to say, “Invest in what you know.” He also said to not bottom-fish (consider that a bonus piece of advice).
Does anyone really know Facebook? Sure, everyone knows what it is. Sure, it has hundreds of millions of users. Sure, Mark Zuckerberg and his entourage were brilliant in conceiving the company. But do you have faith that they know how to run a public company?
What is the business model? How does it make money? How will it sustain growth? There’s never been anything like it in the corporate world, so how can anyone say what it’s worth after just three months in the public eye?
If a reputed valuation expert changes his assessment of the company three times in three months, how can you or I possibly know where this company is headed? I’m not ashamed to admit it—I have absolutely no clue.
The point is that we simply do not know much about this company other than it’s a phenomenon that’s just getting started, had a horribly botched IPO, and disappointed in its recent earnings report. And insiders are selling like mad after the lock-up period.
Of course, that doesn’t stop dozens of analysts from projecting the company’s worth. The Street.com said they’d be a buyer at $13. Our valuation expert says $18. An article on SeekingAlpha pegs the value at $60 billion, which translates to around $28.
So who should you believe? Peter Lynch. You don’t know Facebook. So resist temptation and stay away from the stock, regardless of whether you think it’s undervalued or overpriced.
What about Best Buy? Is now a time to buy? Unlike Facebook, Best Buy is a company we know about. And it’s in trouble. Big trouble.
Here’s the tale of the tape: Net income fell 91% from a year ago. Excluding items, profits came in at 20 cents per share. The consensus analyst estimate called for 31 cents. Quarter-over-quarter same-store sales dropped 3.2%. Yikes.
But honestly, should anyone be surprised? The only time I go to a Best Buy—other than to pick up a...hmmm. Come to think of it, I never buy anything there—is to check out something I plan to buy online. I doubt I’m alone.
The stark truth is that Best Buy has little reason to exist. They devote a good deal of space to music CDs. Really? Does anyone buy those anymore? In a store? Maybe they should try selling 35mm film. In color.
But seriously, why does Best Buy stay in business? Occasionally, they’ll run a super sale that competes with the Amazons of the world. Very occasionally. Or maybe you need something right away. But you’ll pay a hefty premium for that benefit.
I don’t really need to bash the company anymore. The poor souls are having a rough enough time. All I’ll say is that the stock has been dropping like a rock since November 2010, to the tune of about 60%. And there’s no bottom in sight...well, there is zero, I suppose. In fact, the shares are now toying with their November 2008 low (that’s when everything cratered).
Actually, the shares finished well off their lows yesterday, meaning that some buyers stepped in to support the stock. Does that mean you should also step in, since the stock is so “cheap?”
Absolutely not. What is Best Buy worth? How do you place a value on a company whose business model is fast becoming obsolete? Simple answer—you don’t.
You know the phrase about catching a falling knife? This stock is a falling battle ax. The company has nothing going for it and their financial numbers are horrible.
Stay away. No bottom feeding here.
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