Stupidity is contagious. It gets us all from time to time. Even respectable companies can catch it. As I do every week, let's take a look at five dumb financial events this week that may make your head spin.
1. You've got bail
Time Warner (NYSE: TWX ) is finally doing something it should have done years ago. In a filing after another moribund quarterly report, "the Company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL."
Anticipates? Initiate? Oh, please. Go ahead and rip off that Band-Aid once and for all. History is already snickering at the colossal collapse in market value as a result of the ill-timed merger between Time Warner and America Online nine years ago. Now we can begin laughing at the ill-timed divestiture.
It could have cashed out of AOL when Google (Nasdaq: GOOG ) was willing to pay $1 billion for a mere 5% slice of the online arm. It could have unloaded it two years ago, when AOL's high-margin online advertising revenue was offsetting the subscriber defections. Heck, it could have even handed it off a year ago, when Microhoo chatter made a traffic magnet like AOL speculatively valuable. Instead, it decides to make a move after a horrendous March quarter that finds AOL's revenue and operating profits falling by 23% and 47% respectively.
This isn't what investors mean by "buy low, sell high," Time Warner.
2. The E*Trade Baby needs a diaper change
Shares of E*Trade Financial (Nasdaq: ETFC ) took a 34% hit on Wednesday, after the online discount broker warned that it would need to raise more capital. It also posted a wider-than-expected loss for the quarter, but the real shareholder killer is E*Trade's admission that it needs more money. At best, it will be dilutive. At worst, it questions the company's financial viability.
The silver lining here is that E*Trade is as popular as ever with consumers. It added 63,000 net new brokerage accounts during the quarter. Its larger rivals may have gobbled up more traders, but at least its rolls are ascending. Unfortunately, fears of the implications of raising capital loom larger at this point.
3. Putting the "buck" in Starbucks
Starbucks (Nasdaq: SBUX ) continues its gradual fade as a premium brand. Following this week's dreary quarterly report -- where profits fell by 77% on a punishing 8% slide in comps -- the java giant is once again out to debunk the myth that its coffee is expensive.
It has to, of course. When the world's largest fast-food chain is wallpapering Seattle with a "four bucks is dumb" billboard as it plugs its entry into the realm of lattes and cappuccinos, Starbucks can't stand still.
However, instead of responding by proving the worth of its beverages, Starbucks is back with more markdowns. Its latest promotion will be grande-sized iced coffees for less than $2. The company is also positioning its lower-priced Seattle's Best Coffee chain as a growth vehicle.
Price cuts may be a reasonable tactical move in a penny-pinching economy, but it's really the point of no return for Starbucks. It is now paying the price for the mother of all contradictions: over-expanding a premium concept.
4. Limelight sheds sublime light
Now it's time to hand out a dumb award to Mr. Market. After all, when Akamai (Nasdaq: AKAM ) won a $45 million patent infringement lawsuit against smaller rival Limelight Networks (Nasdaq: LLNW ) back in March, the market responded by selling Akamai shares over the next few trading days. Now that a district court judge has overturned the verdict, Akamai's stock gains ground on the news.
Are you kidding me? $45 million, in of itself, isn't a huge sum to a content-delivery network titan like Akamai. However, reversing the patent infringement victory opens Akamai up to more low-priced competition. That isn't good, regardless of the market's appetite for Akamai.
5. The over-under on Under Armour
Investors loved Under Armour's (NYSE: UA ) first quarter report. Sales rose 27%. Earnings soared 38%. Nice.
Now let's get into why the company is in this week's column. Apparel sales -- which still make up two-thirds of Under Armour's business -- grew by just 2% during the period. Nearly all of the growth came from the company's nascent athletic footwear lines.
There's nothing wrong with expanding a brand. There is certainly nothing ugly about widening margins during the new push. However, Under Armour's activewear still defines the company. If folks are tiring of its sweat-shredding clothing, as a mere 2% year-over-year gain suggests, it's time to begin worrying about the shelf-life of the UA brand itself.
Let's beat the dumb drum:
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