Fool Portfolio Report
Thursday, May 23, 1996
NOTE: Our policy regarding Fool Portfolio trade announcements has changed...Click HERE for details (Foolish e-mail list subscribers have a copy in their box, as well). Interested readers should make a point of reading this document.
by Tom Gardner
ALEXANDRIA, VA, May 23, 1996 -- Storage -technology leader, Iomega Corporation (NASDAQ:IOMG), was the latest victim of offline stock chatter today in a publication named "The Wall Street Journal." The stock fell rapidly on word that one of the publication's employees, Roger Lowenstein, had written an article questioning the company's valuation and suggesting that recent growth is the consequence of "hype."
Today's trading activity raises more serious questions about how the growing number of non-interactive financial services are influencing short-term price fluctuations on the stock market. Iomega Corporation, the single best performing issue on all US exchanges over the past 24 months, saw its stock beaten back $6 in early hours trading.
"These offline, print articles are having a measurable effect on company valuations," said interactive-fax publisher, David Forrest. "They challenge the status-quo of collaborative research and analysis by putting all of the power into just a few hands." Conversely, Forrest's fax service, The Fool Fax, is a traditional two-way communication product, where subscribers can publish questions, suggestions, and criticisms of the publication online.
Not so for a one-way offering like "Wall Street Journal," which empowers a single writer to broadcast opinions without any open public channel for response. Analysts say that's exactly what concerns securities regulators today. Iomega's $6 decline---before its $3 1/4 rebound by market close---presents a perfect example of how chatter in non-digital environs creates artificial volatility in the marketplace.
"I've scoured the wires all day and haven't found a single piece of bad news on the company," said Iomega consumer-shareholder, Lee Newman. "Everything points back to that Journal article."
Neither Roger Lowenstein nor Iomega were available for comment this evening. But investors maintain that "Wall Street Journal's" article overlooked key aspects of Iomega's business and its valuation: 1996 sales estimates of $1.5 billion, an OEM deal with Acer, this morning's report that Iomega's Zip drive will be internalized in a Packard Bell home-PC unit, and the company's line of products that have consistently won praise from technologists. "To my eye, this one-way communication is taking the focus off business fundamentals, focusing it on short-term pricing. And it's enabling a few select writers to effect those movements," said Mr. Newman. "I suspect regulation is on the way."
Offline publication "Wall Street Journal" and its parent company, Dow Jones Incorporated, are no strangers to securities regulators. Investigations into something called the "Heard on the Street" column in the late 1970s prompted the indictment of a Dow Jones employee, who was later found guilty of being a "constructive insider" for releasing what was deemed "insider information" on the contents of his article.
Even with that conviction and the greater scrutiny of one-way publishing that has resulted, many investors believe that there are still fundamental flaws to the closed model of financial broadcasting. Iomega's wild price swing today isn't the only example of notable shifts in company valuations based on a single article by a single author.
Many Wall Street insiders maintain that columns like Wall Street Journal's "Heard on the Street" and the offering of another one-way publisher, CNBC's "Dorfman Report," measurably affect stock prices each day. Additionally, non-interactive reports from brokerage firms have been shown to add significant volatility and price fluctuation in the market upon their distribution. In some cases, these reports come from firms that, perhaps not coincidentally, were the actual underwriters of the companies they cover.
But how long will this univocal broadcasting be allowed to continue?
"Many non-interactive publishers are onto something, or would be. But the absence of any performance records, personal records and those of sources cited in the article, greatly concern me," says one analyst. "When investors can't respond to the author, and when that author is essentially anonymous, an artificial process arises which generates short-term pricing inefficiencies. That's what we saw today with Iomega, and have seen with literally hundreds of stocks that have been covered by newspapers, magazines, and television stations over the last year. But what actually disappoints me most is that this closed system of publishing focuses attention on the prices of stocks rather than their underlying businesses."
How seriously securities regulators choose to investigate one-way financial publishing, if at all, one thing seems very clear: The understanding of business fundamentals are being trod underfoot by non-interactivity. Limited space and univocal authority in print, radio and television are creating a new class of stocks movers, a fiery group that doesn't seem to much care about business realities: sales and earnings growth, cashflows, new-product development, consumer-brand values, partnerships and competition, among them.
Whether this offline chatter will lead to market frothiness or serve to direct readers away from the search for and analyses of great businesses, there's no question that the market is being rattled about today by this analog world of non-interactivity.
"Hey, there are some great one-way reporters out there. And I don't actually think Mr. Lowenstein did anything wrong, even with that seemingly artificial $6 decline in the value of Iomega shares this morning. And he wrote a great book on Warren Buffett," said Tom Gardner, author of this column. "But non-interactivity is radically affecting Wall Street, lowering the educational standards that the digital world has set and shooting stocks up and down in a vacuum. That system continues to have many of us wondering why any investor would accept financial information or investment ideas from someone they couldn't engage, question, collaborate with, and whose performance they could not evaluate."
IN OTHER NEWS:
The Fool Portfolio gave back some of the recent extraordinary gains, falling 2.98% today. A week ago today, our savings account was showing 4.64% gains for the month of May. Today, after the 3% decline, we're still sitting on 26.49% growth for the month. The Fool Portfolio is now up 112.48% in 1996 versus S&P 500 gains of 9.75%.
Invest for the long haul.
Tom Gardner, May 23, 1996
Day Month Year History
FOOL -2.98% 26.49% 112.48% 296.76%
S&P 500 -0.36% 3.34% 9.75% 47.47%
NASDAQ +0.11% 4.88% 18.68% 73.38%
*Scroll down or expand screen for full portfolio accounting
AMER - 5/8 ...CHV - 1/8 ...GE - 3/8 ...GPS - 3/8 ... IOMG -2 3/4 ...KLAC + 3/4 ...MDRX - 7/8 ...S + 7/8 ...
Rec'd # Security In At Now Change
5/17/95 2010 Iomega Cor 2.52 51.13 1929.60%
8/5/94 680 AmOnline 7.27 50.13 589.20%
4/20/95 310 The Gap 16.28 32.75 101.23%
8/5/94 165 Sears 28.93 49.75 72.00%
8/11/95 95 GenElec 57.91 84.50 45.90%
8/11/95 110 Chevron 49.00 61.75 26.02%
1/29/96 250 Medicis Ph 27.86 33.50 20.25%
8/24/95 130 KLA Instrm 44.71 27.25 -39.05%
Rec'd # Security Cost Value Change
5/17/95 2010 Iomega Cor 5063.13 102761.25 $97698.12
8/5/94 680 AmOnline 4945.56 34085.00 $29139.44
4/20/95 310 The Gap 5045.25 10152.50 $5107.25
8/11/95 95 GenElec 5501.87 8027.50 $2525.63
1/29/96 250 Medicis Ph 6964.99 8375.00 $1410.01
8/11/95 110 Chevron 5389.99 6792.50 $1402.51
8/24/95 130 KLA Instrm 5812.49 3542.50 -$2269.99
8/5/94 165 Sears 4772.65 8208.75 $3436.10