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I'm not usually at a loss for words. I was stumped the other day, though, by what seemed a simple enough question about former Rule Breaker Excite@Home (Nasdaq: ATHM). This was especially odd, seeing as I'm one of the regular loudmouths (not to mention know-it-alls) on the company's always exciting discussion board.
Community member sa77ba, a.k.a. Joe, posted that he started investing in Excite@Home awhile ago, and that today, after three separate purchases, he owns shares at an average price of $30. As Joe and many others know all too well, Excite@Home shares have recently traded in the $5 to $6 per share range.
Then Joe asked the stumper: Will he ever be glad he owns Excite@Home?
Now, I have no way of knowing what the markets have in store for Excite@Home (which, in the interest of disclosure and commiseration, I also own). Surely Joe knows that. Thinking about his question, though, I realized that it wasn't about Excite@Home as much as it was about Joe and his situation, and what it would take for him to be satisfied with his investment. It's a question only he can answer. That's true for all of us, isn't it?
Even if we have identical portfolios, we'd view them from perspectives that are uniquely our own. Satisfaction with our investments doesn't only depend on the companies we buy, hold, and eventually sell, but on how we set and manage our expectations -- which, by pure coincidence, was one of last week's Rule Breaker topics, in a meditation by David Gardner.
Especially after a year like we've just been through, Joe isn't alone in wondering if a disappointing investment will pan out. One way to approach this is by breaking things down into more manageable bites, and trying to separate the questions we need to ask about ourselves and our expectations, from those we need to ask about the companies, whether they're Breakers, former Breakers, Tweeners, shark jumpers, or just one of your everyday stinkers.
So, you've got a paper loss. At what price are you willing to sell your shares? How long are you willing to hold them while waiting for that price? We can't expect a stock to do what will make us happy, but we can set hopefully realistic expectations and be happy when these are met.
Joe's average price is $30. While that price means "breakeven" to Joe, it means something else entirely to anyone who purchased shares last week at $5. More important, it doesn't mean anything to the stock itself, and has nothing to do with how it will trade in the future.
He might be glad to sell at $30, and gladder still to sell at $60. His expectations, however, need to be based on the company's current situation, rather than what he paid for his shares. After all, Joe's breakeven point represents a 500% increase from here, but it's still some 65% below the stock's all-time high, which looked like a bargain at the time. Still, for argument's sake only, let's say the stock manages to reach $30 and then goes on to $60 over the next 12 months, doubling Joe's money in a couple of years. No doubt, he'd be quite glad he bought and held on to what turned out to be a rare investment.
And, if it took two, three, or five years from now for that to happen?
Except when compared to recent "exuberant" standards, those returns are nothing to complain about, especially with a stock as beaten down as this. What we need to ask ourselves is whether this would meet our expectations -- not only for returns on the dollars we put into the stock, but returns on our time and attention, and on the alternative opportunities we didn't pursue. Those additional "downside dividends" that we pay into some of our investments also need to be taken into account.
Again, these questions aren't about the company or the stock, as much as they're about each of us as individual investors. Only you can answer for you, same as I can only answer for me. Naturally, we'll each come up with different answers. One thing seems certain: The higher our expectations, and the less time we're prepared to wait, the more extraordinary the company's situation must be. So, we also need to ask questions about the company.
Questioning the company
What conditions would allow a company to achieve a given valuation? Especially when trying to make up lost ground or undo damage, how does the company's situation need to change? Can those changes happen in the time we're prepared to wait?
Excite@Home is certainly subject to change, and in fact represents an extraordinarily "open situation." That typically refers to a company that can unexpectedly pull rabbits out of left field -- the announcement of new products, partnerships, and directions that alter its growth potential. But Excite@Home is also an open situation in the more general sense that there's a high probability it will experience changes that aren't easily anticipated.
The company is unusually subject to the actions of other companies. AT&T (NYSE: T) not only has boardroom control over the company, but as the nation's largest cable operator it also controls the broadband pipes on which Excite@Home's business rests. Further, AT&T is spinning out its broadband and other divisions in a monumental restructuring. Being dependent on AT&T, Excite@Home's future direction can't be clear when Ma Cable's strategy itself is in flux. Excite@Home's lack of control over its own destiny was a key reason the Rule Breaker Port decided to sell the stock.
Excite@Home is also subject to actions by cable partners Comcast (Nasdaq: CMCSA) and Cox Communications (NYSE: COX), who are currently dickering with AT&T over changes in the company's ownership. This will be Excite@Home's second ownership overhaul in under a year, its third in less than two years -- not counting @Home's 1999 acquisition of Excite. More than just a lot of politics to deal with, how this works out will determine how, where, when, and even if Excite@Home's partners deploy and promote its services, which puts a question mark next to revenues, earnings, and the price.
You and the company
Just scratching the surface reveals the conflicting interests of a Rube Goldberg ownership structure of Excite@Home. Digging deeper shows that, at bottom, Excite@Home is only a supporting player in its own story.
Because of the AT&T factor, analyzing Excite@Home requires getting a handle on AT&T's strategy -- after all, that's what Excite@Home will need to mesh with. Similarly, the investor's ability to value Excite@Home depends on how it is valued by AT&T.
Strong cable partnerships have always been one of Excite@Home's greatest assets and come as no surprise to investors in the company. Nevertheless, the greatest challenge to investors is how what started as an investment in Excite@Home has become, without a direct merger or acquisition taking place, more and more like an investment in AT&T. Whether that's good or bad, it's definitely different, and an occasion for reassessing expectations.