Mr. Sensitive

February 8, 2014

FSX Friday Update

Filed under: Uncategorized — lbej @ 16:53

Was that it?  Was that the great correction for the NASDAQ?  Let’s see…

  • Intraday high on 1/21: 4,238
  • Intraday low on 1/28: 3.856
  • Percentage drop: 9.0%

Oh, wait…that was what happened in 2000.  My bad.  Here’s 2014:

  • Intraday high on 1/22: 4,246
  • Intraday low on 2/5: 3,969
  • Percentage drop: 6.5%

Back in 2000, what happened after the January pullback is the now-legendary sprint-to-disaster of the turn-of-the-century tech stock bubble, as the NASDAQ rocketed higher by 33% in five weeks, reaching an intraday high of 5,132 on March 10, 2000.  What happened after that is even more legendary: the bubble burst, taking the NASDAQ down 51% over the last 10 months of 2000 (12/29/2000 close of 2,470) and by 78% to the October 2002 bottom at 1,109.

Don’t worry, though, because this time is nothing like last time.  Everybody says so.

What’s the biggest difference?  Splitting your stock was cool in 2000, and now not splitting your stock is cool.  It used to be you weren’t cool unless you announced a stock split, like, all the time.  JDS Uniphase split its stock 2-for-1 three times in the just the last eight months of the bull market (July 1999, December 1999, March 2000).  Maybe you don’t remember JDSU—they make optical network equipment—but this was no Pets.com.  In March 2000 JDS Uniphase traded at nearly $150 per share (after the three splits in 8 months) and sported a market cap of more than $200 billion.  That put it among the 15 most valuable companies in the US back in 2000 , and it would be ranked #13 today, ahead of Pfizer, IBM, Bank of America, AT&T, Visa, and Coca-Cola.  It’s not ranked in the top 13 now, of course.  It’s not in the top 300 now.  From the March 2000 peak, JDS Uniphase stock collapsed:

  • Down 82% after one year (to $26)
  • Down 99% after two-and-a-half years (to $1.50)

Seven years after it peaked at $147 and still trading around $2, JDSU split its stock again in 2006, this time in reverse.  The 1-for-8 split effectively reversed the last three stock splits of the bubble era, reducing the number of shares outstanding to 1/8th of the pre-split total and resetting the stock price from $2 to $16.  Friday, JDS Uniphase—still a leader in optical networking—closed at $13.27, giving it a market value of just over $3 billion.  That’s pretty bad, but at least it wasn’t Nortel.  Don’t remember them either?  Nortel was a Canadian fiber optics company valued at nearly $400 billion in 2000.  When the bubble burst, Nortel stock fell 99.6% in two years.  In January 2009 the company filed for bankruptcy protection.  Six months later it ceased operations entirely.

There were survivors, of course.  In fact, some of the companies at the forefront of the first NASDAQ bubble—against all odds—did much more than survive.  Cisco, Intel and Microsoft were eventually added to the venerable Dow Jones Industrial Average.  Ebay’s market cap topped out at $33 billion in 2000 and is over $70 billion now.  Amazon’s market cap at the 2000 market top was $40 billion; today it’s $165 billion.  And then there’s Apple, now the most valuable company in the world with a market cap of $463 billion.  Apple’s 2013 profit—$37 billion—was greater than the value of the entire company in 2000 ($35 billion).  But more than any of those, the company that best illustrates the full-circle nature of the coming disaster is Priceline.

Priceline.com came public in the spring of 1999, just as the bull market was expanding into a bubble.  The company priced its shares at $16 and they closed above $68 on the first day, a 325% gain in a few hours of trading.  The stock then traded as high as $104.25 in March 2000, up 550% in less than a year.  But Shatner sold his shares—oh, and the tech bubble burst—and the market’s judgment was swift and harsh.  Just look at the closing prices for all twelve months of 2000.

1/2000:  $58.00

2/2000:  $55.94

Intraday high (3/14/2000): $104.25

3/2000:  $81.13

4/2000:  $63.25

5/2000:  $38.13

6/2000:  $37.99

7/2000:  $23.69

8/2000:  $27.19

PCLN broke below its April 1999 IPO price on 9/27/2000

9/2000:  $11.88

10/2000:  $5.75

11/2000:  $2.50

12/2000:  $1.31

I mean…damn.  From $16 to $104, then from $104 to a buck and change, all in less than two years.  Priceline was left for dead, along with every other dot-com company.  Remarkably, it didn’t stay dead (although it certainly played dead for a long time).  PCLN rebounded to around $6 by the end of 2001, only to collapse yet again, trading as low as $1.05 in the fall of 2002.  In 2003 the company executed a reverse stock split (1-for-6), resetting the stock price overnight from $4.25 to $25.50.    Still, the stock languished for several years.

Price after reverse split (6/13/2003): $25.50

2003 closing price: $17.90

2004 closing price: $23.59

2005 closing price: $22.32

But as the housing bubble boosted the economy, Priceline’s stock price began to rise again.

2006 closing price:  $43.61

2007 closing price:  $114.86

So that means the stock—left for dead less than two years after its 1999 IPO—topped its March 2000 all-time-high seven years later…right?  Well, it would have, if not for the reverse split.  Without that 1-for-6 split, PCLN would have six times the number of shares outstanding and the stock price would be 1/6th of its current level (but the company would have the same value—stock splits don’t change the value of the company).  Without the reverse split, PCLN would have closed out 2007 at $19.14—not bad, considering where it was in 2002, but nowhere near its all-time high.  That March 2000 high becomes $625.50 on a split-adjusted basis—almost inconceivable, and absolutely unassailable as the financial crisis unfolded in 2008.

2008 closing price:  $73.65

As we all know now, the world didn’t end, and the extraordinary actions taken by the Federal Reserve and US Treasury to prevent a second Great Depression put a floor under the stock market in the process.  Priceline’s business stabilized and its stock rebounded sharply.

2009 closing price:  $218.41

The Federal Reserve began the second round of quantitative easing (QE2) in 2010.  The artificially-low Treasury yields sought (and achieved) through this unprecedented bond-market manipulation has resulted in systematic underpricing of risk across asset classes.  Double-digit annual earnings growth—which Priceline has legitimately produced since the end of the crisis—has been rewarded with price/earnings multiples reminiscent of the bad, old days of the late ‘90s.  Priceline is a well-run company with a solid business—but does that justify this?

2010 closing price:  $399.45

2011 closing price:  $467.71

2012 closing price:  $620.39

In 2010, 2011, and 2012, PCLN returned 83%, 17%, and 33%, respectively, and it ended that run of outperformance by closing less than one percent away from its all-time bubble-era high ($625.50, split-adjusted).  This valued Priceline at $32 billion.  That may look insane, but from a valuation standpoint it really wasn’t.  In December 2012, PCLN traded at an above-market P/E multiple of 22, but its 2012 EPS of $27.66 was up 34% from the prior year ($20.63) and 167% from fiscal 2010 ($10.35), meaning it had actually gotten cheaper over that time period (2012 P/E of 22 vs. 2010 P/E of 39).  And then 2013 happened.

2013 closing price:  $1,162.40

Priceline is expected to have earned $41 when it reports 2013 earnings in two weeks.  That would represent nearly 50% earnings growth, and it certainly justifies another leap in the price of the stock.  Does it justify an 87% leap?

Nope.

PCLN notched its now-record close on January 23, 2014, at $1,213.29.  Like its parent index, the NASDAQ, it sold off sharply in the days that followed.  Priceline’s intraday low, reached Tuesday (2/4) morning, was $1,107, a decline of 8.7% in less than two weeks.  Does that mean the bubble burst last week?

Nope.

Pundits and analysts uniformly declare that Priceline is cheap(!) at almost 30 times earnings.  And from that intraday low, Priceline rallied 8% in three days, closing this Friday at $1,195.39, about one percent below the all-time high.  Sound familiar?

It should.

We’re in an equity bubble—again—and we’re on our way to 5,000 on the NASDAQ—again.  If that scenario unfolds, I expect PCLN to trade north of $1,800…before finishing the year around $900.  It won’t be the junky companies (Priceline in 2000) that will wipe out the greatest amount of wealth—it will be the high-quality but insanely-overpriced companies (Priceline in 2014) that do us in.

Again.

At least Priceline won’t have to do a reverse split this time; neither will Google ($1,177), Apple ($525), Amazon ($360), Biogen ($315), or FSX member Regeneron ($300).  I guess we have learned something.

Speaking of the FSX…well, the less said, the better.  We sold off with the broader market, only much more.  We rebounded with the broader market, only not as much.  The result?  We underperformed.  Badly.  Again.  The S&P 500 was up 0.8% on the week; we were down 0.3%.  The S&P moved back above its 100-day moving average after easily holding the 200-day; we are solidly below the 200-day and the trend is bearish.  Only three of our 25 members are positive for 2014, and one of them is Zero.  We’re trailing the S&P by nearly 400 basis points and we’re not even halfway through February.  Well, look at that: I’ve said a lot and—as predicted—it isn’t better.

Advancers

  • Zero (Z) +4.5%.  Best performer on the week?  Second-best for the year-to-date?  This indignity simply cannot be borne.  But I’m not concerned.  The standard is clear, and Zero is a man who takes pride in his work.  Zillow—prepare to visit the south side of $40 in the back half of ’14.
  • Marcus (MCS) +4.0%.  I haven’t heard from Marcus in awhile, usually not a good sign.  Of course, it snows all the time up in Yankeeland nowadays and shoveling snow can’t be good for his back.  So why the pop this week?  Maybe he’s taught little Josie to shovel the walk for him—he is an award-winning educator, after all.
  • Jodi Ann (JOY) +3.9%.  That’s right—there’s not one, but two snowbound teachers.  Josie’s probably learned to drive a snow plow by now.
  • Reagan (REGN) +3.9%.  Reagan’s middle-of-the-pack finish in the county spelling bee (she missed predicate and rupee) was extremely disappointing to her, but investors seem to be heartened by the lackluster performance.  That reaction makes no small amount of sense.  In reality, Reagan was never likely to win as a fourth-grader against kids as far along as eighth grade, and coming close would have only added to a growing cockiness that was already undermining her patience and preparation.  Reagan has four more years to win at this level and beyond, and she’s learned (hopefully) a valuable lesson: at the highest level, talent isn’t enough.  Not ever.
  • Charlotte (ICE) +3.2%.  Brinky revealed his ability to speak perfect English—long suspected but never confirmed—to Charlotte in order to secure her aid in his plan to blackmail me (the goal: his own soda fountain).  Will she help her only nephew, or will she flip and turn the information over to me, her beloved brother?  Either way, Charlotte has a lot of leverage considering how tight the LBE2/LBE3 battle-of-wills has become.
  • Josie Ann (JCOM) +1.3%.  Heck, she probably has her own snow-plow business.

Now I’m handing the mic to the ladies for the decliners.  I’ve grumped enough grump for one day.

Decliners

  • Jenny (GNE) -2.5%. Jenny: Should I not say my butt hurts? Reagan: She didn’t get to be in the district spelling bee. Jenny: Cause I so wanted to (slightly sarcastic). Jenny: And J.K. Rowling said Harry and Hermione should be together. That is so stupid. (I can’t continue to type all she wants to say about this, but clearly, it is very upsetting to her.) Jenny: And I’m reading Pride and Prejudice. While it’s a good thing, they just talk so weird! If I used that grammar now, I’d probably be told I didn’t have good grammar. It doesn’t make any sense.
  • Mario the Elder (MGEE) -2.6%. Reagan: He didn’t get to come to my spelling bee. Katie: Dad’s travelling up to Pittsburgh, and he’s no longer used to temperatures below freezing for an extended period of time.
  • Nicole E. (NICE) -3.2%. Jenny: She has a widow’s peak. Reagan: She’s sad that her vacation was only three weeks. So she couldn’t do too much. Jenny: She didn’t go to London.
  • Lisa (LNCE) -3.2%. Reagan: The Bruno Mars concert is all the way in July. Jenny: It’s so long. And – she has to take Reagan. (Fighting commences on the couch beside me between two loving sisters. It involves slaps and tickles.)
  • Lee (TGI) -3.4%. Jenny: Daddy is down because he got a scuba diver’s mask on his face and he couldn’t get it off. Reagan: And he had to sit in a room for 4 hours and watch me spell words incorrectly. Katie: On the plus side, he got to read a book. Jenny: That’s the best part – reading a book.
Name Ticker 2/7/2014 Change
Brinkley BCO $31.18 -0.46
Charlotte ICE $215.53 +6.74
Dustin DST $90.51 -0.49
Icarus FAST $44.23 +0.30
Jenny GNE $9.75 -0.25
Jodi Ann JOY $54.79 +2.00
Josie Ann JCOM $45.92 +0.57
Justin XOXO $11.84 -0.29
Katie CATY $23.61 +0.11
Lee TGI $66.10 -2.32
Lisa LNCE $25.85 -0.86
Lucas CTG $15.84 -0.32
Lulu LULU $47.38 +1.69
Marcus MCS $13.58 +0.52
Mario T.E. MGEE $55.51 -1.47
Mario T.Y. MAR $49.23 -0.07
Namilita NL $10.52 -0.52
Nicole E. NICE $38.20 -1.25
Nicole M. COLM $73.60 -0.75
Reagan REGN $299.79 +11.20
Ruby RJET $9.77 -0.04
Wilson WILC $7.88 -0.24
Winston ED $54.02 -0.39
Zero Z $85.80 +3.70
Zondro ZQK $6.90 -0.15
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