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The Truth About Market Froth

By Barbara Eisner Bayer – Updated Dec 21, 2016 at 5:20PM

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HILLSBORO BEACH, FL (Jan. 27, 2000) -- When volatility visits the market, as it has done for the entire 21st century, inevitable cries of "market froth" and impending doom run rampant throughout the media. We've been hearing warnings that the froth runneth over since way back in 1996, when nary a day went by without a foamy declaration.

Since 1996 the market has gone in one direction -- up -- while frothsayers have been consistently proven wrong. Still, there is no end to the warnings about the Ides of Froth.

It's occurred to me, however, that frothiness isn't always such a terrible thing. There's a process that's used for separating minerals in sulfide ores called "froth flotation," whereby the sulfides are diluted with water and subjected to violent agitation in a tank full of chemicals. This causes the sulfide particles to attach themselves to the chemicals and rise to the top in an oily froth. The valuable metallic constituents of the ore attach themselves to the floating froth, while the valueless gangue sinks to the bottom (to the tune of Gilbert and Sullivan's "Hail, Hail the Gangue's All Here.")

There are many rule-breaking companies that are subjected to the violent agitation of the stock market and cries of "market bubble." Many of these companies have been right here in the Rule Breaker portfolio -- Amazon, eBay, AOL. Perhaps these are merely the creme de la creme, which, like the sulfides, are the valuable constituents floating to the top.

I think that the scientists who've developed the Froth Height Level Sensor need to refine it to analyze the stock market. It could measure the level of froth on any given day when the market reaches new highs or the media broadcasts news of an impending correction. Just imagine -- a single sensor to determine the presence of froth! Investors would be tipped off as to actual vs. rumored froth and could sell all their stocks and head for the hills.

But that wouldn't be Foolish. Since we invest in our companies for the long haul, we are somewhat oblivious to trendy calls of market froth. Not that it isn't annoying when great companies like AOL or Amazon are temporarily jostled when the pundits call them unworthy. While it makes sense that, like the sulfides, some of our best picks will rise to the top of the heap and be battered with labels of "frothiness," this is a short-term occurrence that will prove itself shortsighted.

As Tom Gardner wrote in this very space way back on September 17, 1996:
"We Foolish few are contrarily content to concentrate our attention on but a few things alone and on the faraway horizon-line of a peach-blown sunset. At Fool HQ and beyond, we like researching business, rather than pricing fluctuation. And studying how companies make money and why. And how great marketing programs are ratcheted together and why. And how long-term businesses build everyone into ownership positions (management, employee, customer) and why. And we Fools content ourselves with buying great companies for many years, with making the process of investing a lifelong endeavor, and with disciplining ourselves to peaceably drift a watery course."
Earnings, Earnings, Earnings

Celera Corporation (NYSE: CRA), whose stock has risen over 200% since it joined the Rule Breaker family less than two months ago, today reported a loss of $0.94 per share, due, in part, to a planned increase in expenses related to building its infrastructure for rapidly sequencing, analyzing, and delivering a variety of genomic database products. Right now, the company's earnings are not that relevant. We, of course, are eager to see its subscriber revenues climb, and this year should give a good indication of how that revenue stream will grow. However, we don't expect profits from the company anytime soon, and current results aren't indicative of the company's eventual success or failure. Some call it frothy; we call it Rule Breaking.

Amgen Inc. (Nasdaq: AMGN) had some of the bubbles removed from its froth earlier this week, when it reported a 24% increase in 1999 earnings. According to the company, many wholesalers increased their stock at the end of the year in order to prepare for potential shortages resulting from Y2K problems that never materialized. In addition, this year will see a boost in spending to prepare for the introduction of several new products for 2001. Drugs in the pipeline include Kineret, for rheumatoid arthritis, and NESP, a potential blockbuster drug for the treatment of anemia. As a result, the stock may be under pressure this year; but the money will be well spent as the company sets its sights on the future.

After market close, Starbucks Corporation (Nasdaq: SBUX) put some froth back into its investors' mugs by reporting EPS of $0.18 for the first quarter, beating Street estimates by two pennies. Consolidated net revenues of $527 million reflected a 30% increase from the first quarter of fiscal 1999, while retail revenues increased 29% to $441 million and specialty revenues increased 37% to $86 million. Head on over to the Starbucks message board for further discussion.

May the froth be with you.
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