Nothing gets investor's juices flowing like the prospect of getting in on the first day of trading of a hot IPO. At first blush, it would seem that this would be easy money to be had if you pick the right security, and there is a lot to be said for that. In recent history, Google (GOOG) comes to mind. Google (GOOG) launched on August 19th, 2004 at $85/share and closed on Friday just under $620. That's a nice return on your investment if you got in on the ground floor. Back in late 1998 and throughout 1999 during the dot.com boom, both institutional and retail investors jockeyed for position to get in on the first day of trading of the IPO's of that era. Fortunes were being made. On the first day of trading alone theglobe.com up 606%, Foundry Networks up 525%, Cobalt Networks up 482%, Marketwatch.com up 474%, Akamai Technologies up 458% and the list goes on. Those days are over, but IPO's are back in the news.
There's been a lot of buzz about Facebook this past week because Goldman Sachs (GS) "agreed to invest $475 million into Facebook and initiated plans to raise as much as $1.5 billion through a special purpose investment vehicle marketed to private wealth management customers. The private sales would value Facebook at $50 billion.", according to Joseph Giannone and Matthew Goldstein on Reuters. If you are a Main Street investor and want to get in on the action over at Facebook, you're out of luck. At this juncture it's only being offered to Goldman Sachs' clients with a two million dollar minimum.
The probability that Facebook will go public in the next year or two is high, but even when it launches its IPO, as a retail investor you should probably let it trade for a year or two and see if you can catch it on a dip, preferably under it's issuance price. Sounds far fetched, but stranger things have happened and if you chase it, you will probably get burned. As is, "Facebook is now considered to be worth more than Time Warner, DuPont and Goldman's rival Morgan Stanley.", says William Cohan of The New York Times in his article "Friends With Benefits". Goldman Sachs (GS) already values Facebook at 25 times revenues as reported in the Rueters article by Giannone and Goldstein. That's a sky high valuation for a company that may not yet be profitable.
There are numerous academic studies exposing the less than stellar returns of IPO's, most notably 2002's "Pseudo Market Timing and the Long-Run Underperformance of IPO's" by Paul Schultz of the University of Notre Dame, which amalgamates previous scholarly studies on the subject. What Mr. Shultz's study concludes is that IPO's just don't beat the market the majority of the time. If you are an institutional investor, it might make sense to take a flier with a small percentage of your portfolio on some technology upstart like a Twitter, Groupon, Zynga, Linkedin or Facebook. After all, institutional investors have millions, if not billions of dollars to invest with and can afford to gamble a few million bucks on the next big thing. Institutional investors also have the luxury of getting in at the opening bell on the first day of trading.
It's not that easy for the retail investor. Individual investors usually have to wait until the institutional firms have flipped their shares to get a piece of the action, and then it may be too late to make a decent profit. There are exceptions like the previously noted Google (GOOG), but like Jason Zweig said said in his Wall Street Journal column on January, 8th when discussing Facebook and IPO's: "For every Google, there are hundreds of companies like eToys and Lycos; for every Apple, there are countless casualties like Thinking Machines and Network Computing Devices.". If investing in individual securities is a bit like casino gambling, then venturing into the IPO market is like playing the nickel slots. Rarely do you win. We tend to have selective memories and hearken back to those salad days of 1999 when playing the IPO market was like shooting fish in a barrel. If only it were that easy.
Saturday, January 8, 2011
Thursday, January 6, 2011
The Last Emperor
Back in 2000, Cisco (CSCO) CEO John Chambers graced the covers of what seemed to be all of the major financial magazines. After an incredible run in the 1990's, Cisco (CSCO) surpassed all other companies in market cap and became number one in the world. I know I have no regrets about owning shares in it. It had 3 for 2 splits in 1997 and 1998, and, 2 for 1 splits in 1999 and 2000. In just 2000 alone it had a low of 35 and a high of 82 and you would have almost tripled your money if you bought at the lows. The press glowed about Cisco's (CSCO) prospects and how it would keep on going up because "it was different this time", we were at a "new normal". There was a cornucopia of riches in the tech sector and the gravy train was nowhere near being derailed, or at least that's what the consensus thought. In the year 2001, less than one year after Cisco's (CSCO) all time high, it was trading at 11 and in 2002, it got down to 8.
Cisco (CSCO) is still a great company. During the last decade it was added to the DOW and still does the majority of the behind the scenes heavy lifting in the Internet. The set-top box for my HDTV is a Cisco (CSCO) and besides the already available movies and television programs, they'll be streaming anything relating to cloud computing right into my living room in the not too distant future. Although Cisco (CSCO) is still king of the jungle in internet infrastructure, it's not a great growth stock anymore. It's price has been hovering in the high teens to high 20's for almost ten years now except for a brief period when it hit 34 in 2007. It doesn't even pay a dividend, so your returns haven't been very good for years.
There's nothing wrong with Cisco (CSCO), it just got to be too big of a company. The high growth period for a security has just so much of a shelf life and Cisco's (CSCO) race is run. ValueLine gives it a high of $40 in 3-5 years and that is their most optimistic projection. Doubling your money in 3-5 years is a good return on investment, but it's nowhere near what investors expect from a stalwart that not too long ago made the expression ten bagger seem like chump change. I believe that what Cisco (CSCO) was to the dot com boom, Apple (AAPL) is to the current euphoria.
Apple (AAPL) is a great company. Has been ever since the mid 1970's when Steve Wozniak and Steve Jobs founded it. Sure, they've had some products bomb, but only because they may have been too early to market like with the Newton. I use and believe in their hand-held computers and don't foresee anybody knocking them off their pedestal despite the success of Google's Android mobile operating system. The problem with Apple's (AAPL) stock is that the company is just getting too big and may not have that much more room to run.
Apple (AAPL) is now the number two largest market cap company on the domestic exchanges, second only to Exxon/Mobil (XOM). You could have picked it up for $6 in 2003 and feathered your nest with the incredible gains it has experienced, trading at around $330 now. However, that's an 8 year run and most stocks don't keep rising that long. If you invest in it now, the probability that you will double your money in the next 5 years is minimal. I could see it climbing to $400 with the momentum that's behind it, especially since they are going to be offering the iPhone on Verizon this quarter and the iPad is relatively new, but the price performance of the last 8 years is now history. If you are a buy and hold investor, I just don't see it being a very good place to put your money.
Cisco (CSCO) is still a great company. During the last decade it was added to the DOW and still does the majority of the behind the scenes heavy lifting in the Internet. The set-top box for my HDTV is a Cisco (CSCO) and besides the already available movies and television programs, they'll be streaming anything relating to cloud computing right into my living room in the not too distant future. Although Cisco (CSCO) is still king of the jungle in internet infrastructure, it's not a great growth stock anymore. It's price has been hovering in the high teens to high 20's for almost ten years now except for a brief period when it hit 34 in 2007. It doesn't even pay a dividend, so your returns haven't been very good for years.
There's nothing wrong with Cisco (CSCO), it just got to be too big of a company. The high growth period for a security has just so much of a shelf life and Cisco's (CSCO) race is run. ValueLine gives it a high of $40 in 3-5 years and that is their most optimistic projection. Doubling your money in 3-5 years is a good return on investment, but it's nowhere near what investors expect from a stalwart that not too long ago made the expression ten bagger seem like chump change. I believe that what Cisco (CSCO) was to the dot com boom, Apple (AAPL) is to the current euphoria.
Apple (AAPL) is a great company. Has been ever since the mid 1970's when Steve Wozniak and Steve Jobs founded it. Sure, they've had some products bomb, but only because they may have been too early to market like with the Newton. I use and believe in their hand-held computers and don't foresee anybody knocking them off their pedestal despite the success of Google's Android mobile operating system. The problem with Apple's (AAPL) stock is that the company is just getting too big and may not have that much more room to run.
Apple (AAPL) is now the number two largest market cap company on the domestic exchanges, second only to Exxon/Mobil (XOM). You could have picked it up for $6 in 2003 and feathered your nest with the incredible gains it has experienced, trading at around $330 now. However, that's an 8 year run and most stocks don't keep rising that long. If you invest in it now, the probability that you will double your money in the next 5 years is minimal. I could see it climbing to $400 with the momentum that's behind it, especially since they are going to be offering the iPhone on Verizon this quarter and the iPad is relatively new, but the price performance of the last 8 years is now history. If you are a buy and hold investor, I just don't see it being a very good place to put your money.
Wednesday, January 5, 2011
Collateral Damage
Author's Note: In my last installment I briefly discussed High-Frequency Trading, Flash Trading and Dark Pools. This article is similar to that posting, but, expounds on the subject with additional facts. If the material sounds similar, it is, but because I feel so strongly about it, I am including it just the same. Consider this an addendum or Part 2.
If you have a job and skim from the cash register or emergency slush fund, you'd get fired and even prosecuted. Do the same crime in a country with more Draconian laws, the authorities cut off your hands. A similar offense if you are a wiseguy in the mafia and they'll whack you. I just don't understand why the high-frequency trading technique known as Flash Trading isn't under more scrutiny by the powers that be because the firms that engage in the practice are just skimming off the top and playing with an advantage, like throwing a spit ball or using steroids if you're a baseball player. They're nothing but shakedown artists in my humble opinion and should be regulated, if not eliminated.
During the past year Flash Trading got a black-eye from Main Street because they were purported to be the cause of the Flash Crash in May of 2010. This is an urban myth. According to Graham Bowley in his recent New York Times article "The New Speed of Money, Reshaping Markets": "In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.". I just wanted to clear the air, but I still believe that even though Flash Trading wasn't a direct cause of the Flash Crash, it can make the markets unstable and this is not good for anybody except the anointed few that control the financial grid.
Flash Trading is is a sub-set of High-Frequency Trading and, if you believe that the stock market is primarily comprised of floor brokers on the New York Stock Exchange, you are misinformed. In an article on 1/4/11 by John Melloy, producer of CNBC's Fast Money, he writes: "High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980's, it was two years.". The article also goes on to talk about dark liquidity: "Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James.".
You don't have to be a Rhodes Scholar or a member of MENSA to do a little back of the envelope calculating and come up with a rough estimate of half of all High-Frequency Trading is done via Dark Pools. I don't have facts and figures on this, but I imagine that some Dark Pools also are in the business of Flash Trading. Many of the masters of the universe on Wall Street use every trick in the book to make their meal ticket. They have to to remain king on the hill. The Mom and Pop investor isn't an endangered species, but being a buy and hold investor isn't what it used to be.
If you have a job and skim from the cash register or emergency slush fund, you'd get fired and even prosecuted. Do the same crime in a country with more Draconian laws, the authorities cut off your hands. A similar offense if you are a wiseguy in the mafia and they'll whack you. I just don't understand why the high-frequency trading technique known as Flash Trading isn't under more scrutiny by the powers that be because the firms that engage in the practice are just skimming off the top and playing with an advantage, like throwing a spit ball or using steroids if you're a baseball player. They're nothing but shakedown artists in my humble opinion and should be regulated, if not eliminated.
During the past year Flash Trading got a black-eye from Main Street because they were purported to be the cause of the Flash Crash in May of 2010. This is an urban myth. According to Graham Bowley in his recent New York Times article "The New Speed of Money, Reshaping Markets": "In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.". I just wanted to clear the air, but I still believe that even though Flash Trading wasn't a direct cause of the Flash Crash, it can make the markets unstable and this is not good for anybody except the anointed few that control the financial grid.
Flash Trading is is a sub-set of High-Frequency Trading and, if you believe that the stock market is primarily comprised of floor brokers on the New York Stock Exchange, you are misinformed. In an article on 1/4/11 by John Melloy, producer of CNBC's Fast Money, he writes: "High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980's, it was two years.". The article also goes on to talk about dark liquidity: "Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James.".
You don't have to be a Rhodes Scholar or a member of MENSA to do a little back of the envelope calculating and come up with a rough estimate of half of all High-Frequency Trading is done via Dark Pools. I don't have facts and figures on this, but I imagine that some Dark Pools also are in the business of Flash Trading. Many of the masters of the universe on Wall Street use every trick in the book to make their meal ticket. They have to to remain king on the hill. The Mom and Pop investor isn't an endangered species, but being a buy and hold investor isn't what it used to be.
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