July 10, 1998
Dow Jones Average: 9090
S & P 500 Index: 1159
UP!!.com
While the stock market gyrated nervously last quarter, and the average
U.S. mutual fund lost .3 percent, one group of stocks soared to unimaginable
heights. These glorified stocks have been dubbed the "new media companies"
by analysts. A colorful corporate name is a prerequisite for inclusion
in this group. The sector is led by Yahoo!Inc., and includes less well
known companies such as Excite!, Inktomi, Doubleclick, Lycos, and Zap.
The hottest stocks in this nascent industry serve as portals or gateways
to the internet. They connect individuals to content and services carried
on the world wide web. There is a lot on the web, everything from news,
weather, sports, and stocks, to auctions, chat rooms, and booksellers.
Internet users access and search through all the information and services
by going through one or more of the portal/search companies.
Most of the internet portal companies do not earn meaningful profits
yet. They are attempting to earn money by placing little ads on the
computer screens of people searching the web. And they receive access
fees from content providers who want a particular link to the internet
user community. Even if internet advertising dollars and access fees
increase by quantum amounts, they will continue to be a fraction of
the dollars earned by more traditional media companies. It is too early
to say that the little, blinking ads on the web attract customers. Advertising
on the web is strictly in the experimental phase.
In a bull market environment investors let their imaginations run wild.
Stocks that combine mystery, the right concept, and a cool name are
just more fun to own. So Yahoo! skyrockets to a market value of more
than 10 billion dollars on minuscule financial results. According to
investors Yahoo! is now worth 3 billion dollars more than the New York
Times company. The New York Times owns the nationally distributed NY
Times paper, the Boston Globe, dozens of regional newspapers, magazines,
TV stations, and a top shelf web site visited by millions of viewers
and supported by many advertisers. But in the stock market the unique
franchise owned by the Times is worth less than a portal company such
as Yahoo!. It must be the name.
We have a suggestion for the next for the next group of entrepreneurs looking to make it big in
the internet/stock market. Name your new company UP!!.com and the rest should be
easy. As with most of these new e-commerce companies this company would have more
of a business plan than a real business. The plan would be to merge the good feeling
sweeping the U.S. stock market with interest in the net. We are not sure what all these !
marks mean after internet stock names, but as they seem to attract investors we figure
two !! are better than one. On second thought, perhaps we shouldn’t be airing these
ideas before registering the name. It could be worth a billion or so by itself.
Current Strategy
Stepping back from the frenzied action in a few internet stocks, it is apparent that
most stocks are struggling to maintain forward momentum. The bullish market tide is
no longer lifting all boats. Many stocks are sinking, their popularity punctured by disappointing
earnings announcements. Investors are clamoring to get on board the most
reliable, predictable stocks, such as Coke, Microsoft, and Cisco. While the immediate
impact is a price rise in those favored stocks, history shows that narrow stock rallies
precede market declines. Eventually the weight of investor hopes and expectations
becomes too great for a few stocks to carry.
We are concerned by the narrow market rally, economic collapse in Asia, weak profits
for many companies, and the record valuation level of the market. An even greater
concern is the complacent attitude held by most market participants. Many investors
believe that the market is invincible, unsinkable. They see every dip in stock prices as a
buying opportunity regardless of underlying fundamentals. Blind faith may be rewarded
in a rising market, but it will be a costly position when the market changes direction.
Over the past few months we made very few new stock purchases as the risks simply
outweigh potential rewards at current price levels. We have been active in the bond
arena, filling out the fixed income portion of portfolios. We continue to closely
monitor the earnings progress of companies in the portfolios, and are generally very
pleased with the results.
