FOOL ON THE HILL
An Investment Opinion
"Sell 'Em All!"? Abelson Does It Again Bill Barker (TMF Max)
January 27, 2000
Alan Abelson, the lead editorialist for Barron's, has long been noted around these parts as the quintessential contrary indicator. His ability to miscall both the market generally and individual stocks specifically is so revered that his bearish calls about companies are cited in Rule Breakers, Rule Makers as one of the best ways to find ideas for potential investments.
This piece of Foolishness came back to me as I accidentally stumbled across another good example of Abelson's remarkable abilities contained in his January 10, 2000 column mentioning 10 stocks to short right now. ("Sell 'em all!" the article exhorts.)
Since publication, in less than two weeks, 7 of the 10 stocks have risen (3 by more than 20%, one by over 50%), and as a group the stocks are up over 10%. All in a mere eight trading days during which the rest of the market has been essentially flat. Here's the list:
Corporate Executive Board Co. (Nasdaq: EXBD), E-Tek Dynamics, Inc. (Nasdaq: ETEK), Inet Technologies, Inc. (Nasdaq: INTI), Mission Critical Software, Inc. (Nasdaq: MCSW), NetCreations Inc. (Nasdaq: NTCR), Quest Software, Inc. (Nasdaq: QSFT), SERENA Software, Inc. (Nasdaq: SRNA), Tanning Technology Corporation (Nasdaq: TANN), TenFold Corporation (Nasdaq: TENF), and The Management Network Group's (Nasdaq: TMNG).
The sole reason this list and article caught my eye is that I happen to know somebody reasonably high up the chain of command at the first company on the list, Corporate Executive Board (CEB). I've been mildly following from afar the progress of the company as its stock has gradually tripled since its IPO in February of last year. The individual I happen to know has got a couple of Ivy League degrees, which might be the kind of thing that would impress people, unless, like myself, they've watched him lose money hand over fist late one night at an Atlantic City blackjack table while seated next to somebody dressed as a giant carrot. Granted, I was the one dressed as the carrot, but it was, after all, my bachelor party. At any rate, is a sole employee's one-time late-night proximity to a drunken Carrot Man reason enough to declare a company a good short? Or is there something more?
To provide just the mildest outline of background, CEB provides research and analysis focusing on corporate strategy, operations, and general management issues. The company provides its research and analysis to corporations on an annual subscription basis, and according to its latest 10-Q, the company provides work to over 1300 of the world's largest corporations. Sales currently appear to be growing at a level of about 30-35%, and earnings a bit faster than that. From the public filings, business appears to operating reasonably smoothly and profitably.
So why the short recommendation?
Abelson provides the source of the list as coming "from the venerable Charles Allmon, proprietor of the famous Growth Stock Outlook and one of the keenest stockpickers around.... These 10 made the cut among many deserving candidates for his package of short sales, Chuck explains, because the stocks are selling at such towering multiples of sales."
Okay, to address the first issue first, the description of Charles Allmon as one of the keenest stockpickers around needs at least some examination. I spent about 0.14 seconds with Google (is there any better search engine than Google?) finding information on Mr. Allmon, and the first article that turned up was a November 1998 Business Week piece entitled "Advice from Market Bear -- and Value Investor -- Charles Allmon." Among the items in the article about Mr. Allmon were:
-- His cash holdings at the time were 92%.
-- From June 30, 1980 to the time of the article, according to Hulbert Financial Digest, the Growth Stock Outlook has returned 12% annually while the Wilshire 5000 Equity Index (the broadest stock market index) has gained 15.8%.
-- Mr. Allmon speculated back in November 1998 that the Dow would lose 40% to 60% of its value from its high by 2000, plus or minus one year (so far the Dow is up an additional 25% since the prognostication).
-- Over the previous five years, Allmon's portfolio had gained 8.3% annually, while the Wilshire 5000 had gained 17.6%.
-- Allmon forecast a recession for 1999, with corporate profits down 2-3% (I'm pretty sure this didn't happen).
-- Allmon felt Coke was "a good $17 stock." (It currently trades for around $59 a share, and hasn't seen $17 since 1991.)
In other words, despite the rather blithe description of Allmon as one of "the keenest stockpickers around," at the very least Allmon needed to be described to Barron's readers as a very long-term bear, a suspect market-timer, and somebody whose valuation techniques (Coke at $17?) are, ummm.... somewhat unique. In fairness, despite being a market-underperformer, it must be noted that as of the November 1998 article Growth Stock Outlook did rank No. 1 of all stock newsletters tracked by Hulbert Financial Digest on a risk-adjusted basis, presumably because of its ongoing large exposure to cash. (Though if the best newsletter dramatically trails the market over an 18-year period, what does that tell us about newsletter writers? Or risk-adjusted modern portfolio theory?)
So while it may be fair to describe Allmon's stock-picking abilities positively, many readers would want to know a little bit more about Allmon's general attitudes toward this market before going out and shorting specific stocks, right? Apparently though, peeking behind the screen of the Wizard is not that necessary -- at least according to Abelson.
The sole justification provided for shorting these stocks, remember, is their high price/sales ratios, rather than any general problem with any of the companies specifically. Fine -- a high price/sales ratio might be one useful data point in deciding whether or not to invest in a company, but a "too high" price/sales ratio apparently wasn't what JDS Uniphase (Nasdaq: JDSU) was looking at when it bought E-Tek Dynamics a couple of days following the publication of the Abelson's advice, sending the price of E-Tek shares to a quick double.
Similarly, just eyeballing the financials of a bunch of these companies (most of which seem to be growing annual sales, profitably, in the 50-100% range), what I find is some pretty decent companies. Maybe some are overpriced, maybe they are not (the market's been saying they're not over the past two weeks), but before going out and shorting all 10 (as Abelson quotes Allmon as "absolutely necessary"), Fools certainly want to know something about the quality of the companies, their market positions and many, many other things beyond their price/sales ratios.
The fact of the matter is that if you pull out a bunch of companies that are united solely by a commonality that their price doesn't seem rationally related to a sales multiple, indeed, you've probably arrived at the proper answer -- and it isn't that those companies are good short candidates. The price probably isn't related to a sales multiple, but to something else entirely, like competitive advantage period or return on equity. Insisting on using the wrong tool for the job is a really good way to hurt yourself, or as Charlie Munger, Warren Buffett's partner at Berkshire Hathaway (NYSE: BRK.A) has noted, "To a man with a hammer, everything looks like a nail."
Going beyond a hammer and nail valuation seems just too detailed for the article in question. The issues that would explain why these firms are valued the way they are (or perhaps even undervalued) takes more ink than a simple chart that picks out a single statistic that makes things appear overvalued. Absolutely every company can be made to appear overvalued if you pick and choose your numbers carefully enough, which is one of the first things that anybody following the market comes to learn.
Foolish readers, who aren't going to rely on the stock picks of some Abelson-designated guru in the first place, might not find themselves taken in by these kinds of shenanigans. But Barron's readers are likely to fare a lot worse. That is unless they're treating the lead editorial as the unintended source of good ideas that it is.
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