I'm shocked, but not surprised, to see that Standard & Poor's has elected to remove WorldCom (Nasdaq: WCOM) from the S&P 500. Shocked because this is a company that, within the last three years, had been valued at nearly $190 billion. I know, there are so many companies that are valued at the billions and billions levels that those numbers might not seem so big. Let's break down $190 billion, shall we?
WorldCom was valued at the equivalent to:
$30 per person living on Earth;
$740 per American man, woman, and child;
$2,000 for every sheep in Australia;
1.8% of the American gross domestic product (GDP);
100% of the GDP of Switzerland, Saudi Arabia, or Sweden.
As I write, WorldCom is valued at a hair under $4 billion, meaning that the value has declined by $186 billion since 1999. Or, just to be absurd, in the last three years WorldCom has lost in market cap:
$5.3 billion per month;
$177 million per day;
$7.3 million per hour;
$123,000 per minute.
Ouch. Now, the reality is that WorldCom was worth nowhere near what it was priced in June of 1999, so investors should at least partially blame the market and its tendency to misprice equities for extended periods of time. Regardless, that is a massive amount of money that has vaporized, and it just shows what can happen when a company makes poor choices in its capital deployment. This is why such well-known names as Alberto-Culver (NYSE: ACV) and Pactiv (NYSE: PTV) remain on the S&P 500, while WorldCom gets the boot, for that catch all reason "lack of representation." This means, broadly, that people are not interested in a company anymore. I'd say that's untrue for WorldCom. People are interested; they're also running away in horror.
One of the benefits of investing is that we can now ignore that $186 billion in erased market cap, if we want. If we choose, we could invest in WorldCom, the $4 billion company. We must keep this fact in mind, though: The market is saying that WorldCom is going to collapse. While it would be dumb to dismiss this sentiment out of hand, one must recognize that, though the collective market is not dumb, it is often wrong.
It is unreal to see some of the big boys of yesterday laid this low. Lucent (NYSE: LU), once valued at $240 billion, is at $16 billion. Nortel (NYSE: NT), once $270 billion, is now at $8.5 billion. And these companies are all in very real danger of disappearing. Why? Well, yes, their businesses have all tanked. But JDS Uniphase (Nasdaq: JDSU) has gone through the same miserable market but isn't really in danger of going out of business, because it at least showed some balance sheet discipline, taking on small amounts of debt but not depending on it to fuel growth.
Buy cheap, not risky
Our job as Rule Makers is to try to find top-notch companies that are temporarily out of favor so we can try to get them at a good price. The companies above are dirt cheap, but (with the possible exception of JDS Uniphase) are in no way at good prices. Why? It comes down to this: These companies are in real danger of going bankrupt. They're in lousy businesses and are counting on other companies also in lousy businesses -- the telecom and data carriers -- to start spending enough to bail them out with increased cash flow.
I can't say that it's not going to happen. As a matter of fact, I think that we are coming up on a point in time when the near total halt in telecom infrastructure spending is going to start causing some significant undersupply on certain routes, long-haul and metro. But, for every single one of these companies, there will be plenty of warning of an upsurge. Just watch the revenue levels of the big telecom companies. When they start rising, and when they start gaining some pricing power, it may be time to start looking. On the whole, there's not much in the market that I'm all that excited about these days.
But here's what's different: Of the very few true bargains these days, I'm convinced that we could find one or two in telecom or in the media, two of the most fluffed-up sectors from the olden days. Technology, suppliers and so on, probably aren't worth our attention yet -- they've got plenty of shakeout left in them. The problem with the Rule Maker, of course, is that it is doubtful that we'll find a bargain telecom company that meets any of the even basic tests -- and we don't want to get into the habit of trying to find "emerging Rule Makers" again, companies either are or they are not.
The thing is, when we talk about bargains, we don't want anything to do with companies that seem to be permanently impaired. I could see scenarios where a Nortel or a Lucent repairs itself. These are not dead companies, but I don't like the odds at all, even at $2 and change a share. I'm less negative about WorldCom (enough to even think about -- urp! -- the bonds), but I think there will be plenty of opportunity to view improving conditions in the company before even considering to buy the common stock. In these cases, a buck or two isn't so much an opportunity as it is a message, as clear as the rattle on the back of a snake. They say, "Stay back! I'm not happy!" Only too glad to oblige.
I've gotten some really good ideas from people in terms of companies that we can profile as Rule Makers. Some of the most intriguing have been Harley-Davidson (NYSE: HDI), Washington Mutual (NYSE: WM), Boeing (NYSE: BA), and State Street Bank (NYSE: STT), which are obvious Rule Makers. Others I find awfully compelling are CDW Computer Centers (Nasdaq: CDWC) and Patterson Dental (Nasdaq: PDCO), both of which are small but seemingly dominant in their fields. Please keep the suggestions coming!
Bill Mann, TMFOtter on the Fool Discussion Boards