If Valentine's Day were for stocks, every investor's portfolio would have candidates for a box of those Necco wafer hearts with cute phrases ("Oh you kid" is gone, to my and Mr. Burns' despair.). Unfortunately, in the last two years, there are probably more candidates for rejection, including many so-called "tech" stocks. In honor of Thursday's holiday, we score the performance of all the tech Rule Breakers we considered but that got away since August 2000.
Did I say "tech" -- the label David Gardner calls exhibit number one of investing fuzzy thinking? Well, just call me a prisoner of the Law of Limited Headline Space. If I had headlined this article "Scorecard for stocks we loved and lost whose businesses are producing or enabling computer software or hardware, computer networking, telecommunications equipment, or semiconductors," no one would read it -- not even my relations, who sometimes provide the only clicks I get. Yet even that attempted definition shows just how broad and empty the label really is. We are business-focused investors at The Motley Fool, and groupthink labels distract us from understanding individual companies.
Because I can't change the headline world, tech it will be, and biotech too. I owe it to Fool community member psuasskicker for pointing that out when I made some lame attempt to define biotech as special and somehow not tech. I'm very grateful, because we depend on each other in Fooldom to help each other learn. It led me to argue that it's un-Foolish to invest in sector mutual funds such as biotech, where labels are marketing fodder for funds that lump together dissimilar businesses into superficially similar categories. Thanks, psuasskicker!
Scorecard: the 9/2000 buy
When we looked high and low for a new investment in August 2000, we considered over a dozen stocks, including many techs and biotechs such as application services provider USinternetworking (OTC: USIXQ), business-to-business e-commerce enabler Ariba (Nasdaq: ARBA), and home grocery deliverer Webvan. Also in the running were Internet delivery technology provider Akamai (Nasdaq: AKAM), reverse auctioneer Priceline.com (Nasdaq: PCLN), wireless Web enablers InfoSpace (Nasdaq: INSP) and Phone.com ï¿½ now part of Openwave Systems (Nasdaq: OPWV), and last, and quite definitely least, speech recognition software maker Lernout & Hauspie. With the possible exceptions of Webvan and Priceline.com, it's pretty easy to call these "tech" companies, along with biotech drug makers and Human Genome Sciences (Nasdaq: HGSI), which we eventually chose from this group, and Millennium Pharmaceuticals(Nasdaq: MLNM).
Price Ticker 9/22/00* 2/11/02 % Gain/Loss AKAM $ 56.25 $ 3.88 - 93% ARBA 168.75 4.68 - 97% INSP 34.25 1.83 - 95% Lernout & Hauspie a lot bankrupt -100% MLNM 74.22 20.25 - 73% PCLN 21.88 4.20 - 81% OPWV 106.00 6.34 - 94% USIXQ too much pennies - 99% Webvan mucho belly up -100%
PURCHASED: HGSI 87.09 26.19 - 70%
Nasdaq 3803.76 1846.66 - 51% *split-adjusted
With 20/20 hindsight, the best performer would have been a non-tech candidate, Edison Schools (Nasdaq: EDSN), down a mere 53%. Our choice, Human Genome Sciences, would have performed least badly of the sorry remainder, if we hadn't sold it for a tax loss and repurchased at a higher price. All in all, this group's lousy numbers, bankruptcies, and near bankruptcies remind us again that even thinking about Rule Breaker investing is risky. This gives new meaning to The Motley Fool guideline not to invest money in stocks that you absolutely cannot afford to lose.
Winter 2000-Spring 2001
We took a short breath after the September 2000 purchase of Human Genome Sciences, but before long we were on a roll again. We scrutinized a slew of companies from November 2000 to August 2001 clearly in the tech universe.
The Team eyed control device networker Echelon (Nasdaq: ELON), fiber optic networking components and subsystems makers JDS Uniphase (Nasdaq: JDSU) and Avanex (Nasdaq: AVNX), alternative energy enabler American Superconductor (Nasdaq: AMSC) and Energy Conversion Devices (Nasdaq: ENER), and personal digital assistant magician Handspring (Nasdaq: HAND). Not to forget security software comer Check Point Systems (Nasdaq: CHKP), embedded software leader Wind River Systems (Nasdaq: WIND), alternative energy developer FuelCell Energy (Nasdaq: FCEL) and memory chip technology designer Rambus (Nasdaq: RMBS). We also considered biopharmaceutical company Millennium Pharmaceuticals again, and bought it this time, a year after its first audition.
Not content to consider buys, we also courted controversy by pondering shorting Handspring's competitor Palm (Nasdaq: PALM) and Research Frontiers (Nasdaq: REFR), a company whose 35-year lack of products or profits I questioned, to the detriment of my e-mail box.
Date Price Ticker Cons'd Price* 2/11/02 % Gain/Loss AMSC 2/21/01 $18.75 6.56 -65% AVNX 5/2/01 16.50 4.25 -74% CHKP 8/22/01 34.46 32.74 - 5% ELON 11/28/02 24.19 18.39 -24% ENER 4/5/01 23.25 21.26 - 9% FCEL 8/22/01 16.35 16.10 - 2% HAND 5/2/01 10.35 5.90 -43% JDSU 5/2/01 23.85 6.92 -71% RMBS 1/9/01 45.00 6.73 -85% WIND 2/22/01 27.38 16.82 -39% SHORT: PALM 5/7/01 8.27 3.30 +60% REFR 7/27/01 25.99 17.75 +32% PURCHASED: MLNM 9/27/01 16.06 20.25 +25% *split-adjusted
The winners so far are our actual buy, Millennium Pharmaceuticals, and the two shorts, assuming you could have obtained shares to borrow and held on. We did short biochip pioneer Affymetrix (Nasdaq: AFFX) for a nice 31% gain between June and September 2001; we hope for a similar or greater gain from our new short of Sirius Satellite Radio (Nasdaq: SIRI). Check Point, FuelCell Energy and Energy Conversion Devices have fared the least badly otherwise, with Rambus, JDS Uniphase, Avanex, and American Superconductor the big losers. The first three have seen their markets collapse, while the last had a big recent product disappointment and is burning through the last of its cash.
Where's the consumer brand?
One reason for not snapping up many of these companies was brand. We believe that a strong consumer brand or its possibility is important because it helps a top dog and first mover in an important, emerging industry have a better shot at an enduring future. Except for Palm, Handspring, and Priceline.com, all the surviving companies face brand recognition problems. Either they are a Check Point Software, Akamai or Ariba selling to information technology industry specialists, or they are JDS Uniphase, Avanex, or Energy Conversion Devices persuading companies to design their products into others that are then marketed to end users. The former creates a brand inside a small world, and the latter means companies that push their own brand, not their components'.
A Dell (Nasdaq: DELL) computer may have Rambus's memory inside, but Dell trumpets its machine's performance. It mentions Rambus's RDRAM (now there's a catchy brand) technically in the specs, but does not scream from its web pages "Rambus Inside!" JDS Uniphase and Avanex sell to systems makers that then court the household name service providers such as AT&T (NYSE: T) or Qwest (NYSE: Q), who market speedy networks, not the brand of those networks' Raman amplifiers or broadband wavelength lockers.
So what if we didn't buy them?
We passed on all of these, not because they weren't or aren't fine investments for certain investors, but because they didn't meet our strategy's criteria. There is no right or wrong, and investing in individual stocks is entirely about you, your individual goals, comfort level, and strategies. That's key: This column and the Rule Breaker strategy are models, not recommendations. They are forums for investing education -- for batting around the whys and wherefores of doing it this or that way. Want to join in? Visit the Rule Breaker discussion boards, for the portfolio Strategies, Companies, and Beginners. You can be a part of the discussions as a Charter Member of the Fool Community and snag a free extra year -- but hurry because the offer expires Wednesday at midnight.
Tom Jacobs (TMF Tom9) jingle heimer schmidt. He owns shares of Echelon, Energy Conversion Devices, JDS Uniphase, and Rambus, and you can see all his painful stock holdings on his profile. We are investors writing for investors.