A History Lesson

I wrote this piece not a long time ago, I thought I would share as there is a lot of overlap with Saul’s method and with recent discussions on this board.

It’s my analysis of an old article that was published just before the dot com bubble started bursting:

Do You Believe? How Yahoo! Became A Blue Chip A tale of how Wall Street and the rest of us learned to stop worrying and love an insanely valued Internet stock.

http://archive.fortune.com/magazines/fortune/fortune_archive…

(note the ironically fitting reference to Dr. Strangelove just months before the meltdown)

It’s a great read all around but here are some notable excerpts:

Today Lise Buyer covers 13 Internet companies. She has a “buy” rating on 11 of them. Yet she concedes, “I still can’t make the math correlate with the stock prices.” No matter.

This is a story about one of the companies Lise Buyer has a “buy” on: Yahoo. More precisely, it’s a story about Yahoo’s stock price, which, as FORTUNE goes to press in mid-May, stands at $158 per share.

Under the old, pre-Internet rules, a company with Yahoo’s revenues and projected growth rate might be able to justify a market cap of, oh, $3 billion. Instead, Yahoo’s market cap stands at $34 billion. Its P/E ratio in mid-May was around 1,062.

Needless to say, after the bubble burst YHOO stock never again rose to even half that price. The lesson here - a company trading at 300 times the revenues (not earnings, revenues!) is insane. Lesson 2, we are nowhere near those valuations now. For comparison - AMZN trades at 4 times revenue, TSLA at 7, SHOP at 20. That’s about as crazy as it gets nowadays.

Despite its unfathomable market cap, Yahoo is now viewed as a stock “safe” enough to be held by mutual funds that manage retirement money for tens of millions of Americans. Analysts routinely categorize it, along with AOL, Amazon.com, and eBay, as an Internet “blue chip.” Fund managers buy Yahoo for “defensive” purposes.

“Do you know why people like me own this stock?” asks Roger McNamee. “We own it because we have no choice.

McNamee is one of the best-known tech investors in America. He was in on Yahoo’s IPO and has owned shares of the company for most of its brief life. He appreciates the “brilliance,” as he calls it, of Yahoo’s business model and the abilities of Yahoo’s management. He likes Tim Koogle a lot. None of that entirely explains why he’s of late been loading up on Yahoo and other Internet stocks: “I buy these stocks because I live in a competitive universe, and I can’t beat my benchmarks without them.” What he thinks about their valuations is irrelevant. “You either participate in this mania, or you go out of business,” he says. “It’s a matter of self-preservation.”

This was the most striking information for me - institutional investors felt they had no choice but to invest. Just like banks in 2006 felt they had no choice but to hand out mortgages to “no income no assets” folks. I guess when you see this kind of thing happening again, run for the hills!

Having never completely gotten rid of her “valuation bias,” she [Lisa Buyer, the analyst] actually wrote a quarterly “valuation report” for her clients. It was primarily an effort to find meaning in relative valuation measures. But she conceded up front that she was still groping for answers. “People expect Internet analysts to have the answer,” she says. “But we don’t. This is about adjusting on the fly.” In one recent report, she joked, “We think the variable that might most explain current relative valuations could well be the number of weekly mentions on CNBC.” In that same report, though, she wrote bluntly, “At some level, the attempt to rationally explain the valuations on Internet securities is an exercise in futility.”

Another good lesson - if you don’t have a rational understanding of something, better stay away from it.

Now is the time to climb aboard. To look at the list of Yahoo shareholders is to realize that pretty much all of Wall Street is along for the ride. Data compiled by Thompson Financial Securities Data show that Fidelity, AIM, Janus, and Alliance Capital are shareholders. So are Mellon Bank, Chase Manhattan, and State Street Bank. Well-known hedge funds like Tudor Investment Management own the stock. The Ford Foundation owns the stock. The IBM Retirement Plan owns the stock.

Are there any holdouts left? Well, there’s one at least. The fund managers at T. Rowe Price have yet to buy their first share of Yahoo.

Final lesson. Use your head. Don’t invest in ventures you don’t understand and whose miraculous rise you can’t explain just because other people, even famous ones, are investing in them. T. Rowe Price never invested in Yahoo and didn’t lose a cent when the dot com bubble burst.

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Wow, great find! Really paints a picture of how crazy things were then and love the old slang thrown around. I remember being in the T Rowe Price Science and Tech fund in my 401k back then. It took a big hit when it popped but I guess a lot of stuff did.

We are no where near that kind of mania and I think a lot of people keep things in check after 2 melt downs like that within the last 18 years. Probably why it’s so hot topic.

Hey Saul, when did you get out? How many months left of watching the craziness before it tanked? That must have been a very emotional time! I was young and just beginning to invest in my 401k and didn’t know anything. Mostly racing motorcycles and chicks! Haha

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stenlis: For comparison - AMZN trades at 4 times revenue, TSLA at 7, SHOP at 20. That’s about as crazy as it gets nowadays.

ABMD, a serious potential target of mine, P/S = 30+. I have grown more wary of it as that ratio was pointed out, and how way beyond it is compared with other successful companies’ numbers. No shares here yet, but still lusting after some ownership. Kinda like a moth to the flame syndrome. Sigh.

BB

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ABMD, a serious potential target of mine, P/S = 30+. I have grown more wary of it as that ratio was pointed out, and how way beyond it is compared with other successful companies’ numbers. No shares here yet, but still lusting after some ownership. Kinda like a moth to the flame syndrome. Sigh.

By no means am I trying to convince anyone to buy ABMD at this point, but I will say that they have a significant moat on the competition front, and a potentially wide-open market in front of them. The potential for that sales part to catch up is reasonably high. People are not going to stop having heart issues (especially the way we tend to eat in developed countries) or diabetes or whatever, and Impella has now been proven to be more cost-effective for the insurance providers. That alone can be a driver. The rest is just a matter of physician education and time, I think.

Granted, I have a giant safety cushion with an effective cost basis of $80, but I am also looking to add to my holding. Just not in the $440s where it was recently, unless something else changes in those metrics.

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Not trying to make any statement here, but saying there was a time that was way more over valued than todays stocks does not exactly strike me as an argument that todays prices are reasonable. Kind of like saying that it is not hot out today because 18 years ago it was way hotter.

In truth it sounds like you are getting a little concerned…

Randy

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Also, for the edification of the board, I found the memorable quote by Scott McNeely, CEO of Sun Microsystems, via Google at https://the felderreport.com/2017/10/26/what-were-you-thinking.

Ten times sales? Pah, that’s nothing these days!

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Not trying to make any statement here, but saying there was a time that was way more over valued than todays stocks does not exactly strike me as an argument that todays prices are reasonable. Kind of like saying that it is not hot out today because 18 years ago it was way hotter.

In truth it sounds like you are getting a little concerned…

In truth, I did not expect ABMD to go from $72 to $446 in such a short period. No way I would have predicted that. I can try to explain that or dispute it a number of different ways, but most of them end up in “no one really knows what the market will do” territory, so not beneficial for this audience in the end.

I’m not concerned enough to sell my shares, if that’s what you were implying (not even if they hit $300). But sure, in the back of my mind, I always wish I’d sold off at the high point for a swell 500% gain. But then I’d be concerned about when to go back in. And for a company like this, with the true moat I believe they have, and the long-term horizon I have for this stock, I’m happy to let it do its thing and add more along the way if the opportunity presents itself properly.

TL;DR: I have a high conviction for this company.

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Hi hlygrail. Not really implying anything ot

Sorry, faulty return hit.

As i said, not implying anything other than using the argument that prices have been higher to say they are not too high now is not very satisfying.

I am wondering how long this “cloud /SAAS” bull market (and clearly that is what it is) will continue. One the one hand, these companies are growing rapidly. On the other, their stock prices have been growing even faster. As you will see if i ever get my quarterly summary out, i have a good exposure to this “industry”. Not narly what many here have, but that is okay.

The question is whether this really is a significant change in how the business world will work going forward. And will the very strong growth Continue.

Personally, i think it can. But i will admit The almost daily price increases make me nervous that there could be a big direction change and some significant drops coming. No predictions her, but as Saul has said, this just cant continue, can it?

Randy

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there could be a big direction change and some significant drops coming.

change that “could be” to “will be” . For sure. But when, will you be able to recognize it before everybody else?

Don’t buy these stocks if you can not take at least a 50% loss, because most will go down at least twice as fast twice as far as the SP500.

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