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AOL like Iomega? Buy? Sell? Hold?

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By teacherjh
April 2, 2002

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(A response to somebody else's question that might be of interest here)

Iomega was a one product company whose stock took off based on the premise that its one product (the zip drive) would replace the floppy and become THE industry standard. It didn't happen.

Further, this was the first stock whose speculative promise was fueled at Internet speed (on the Fool), and it got way ahead of itself. Even if the zip drive became standard, it would take more than that to fulfill the promise of the stock price. Maybe that would have come in its time, but since the company failed to deliver on this premise, the stock failed.

AOL is not Iomega. It is multiply layered, many pronged, ubiquitous presence in the world. It IS the industry standard, for better or for worse. Ten years ago we bet on the future, well, the future is here. The paradigm shift has happened. Now it's time to make this future work.

AOL has always been doomed by the press. Microsoft was going to bury it. It was a fad that would fade like CB. The sucky browser would doom it. The free Internet services were going to kill it. Microsoft's MSN was going to bury it again. AOL users would become sophisticated and move on to the "real" Internet. The busy signals would choke it to death. Broadband was going to be its downfall. Microsoft was going to crush it again. Been there, done that.

The stock price has not been a smooth elevator ride upwards by any means. A few years back it went from 71 down to 22 and didn't recover for almost two years. If the stock went up to 158, you might still be unhappy. All it would have to do is go to 400 first.

What you - what we all - need to do, is to separate the stock price from the company. The stock price is NOT based on the value of the company. It is based on public opinion, or more to the point, on the ratio of public opinion to investable cash. Public opinion is based on two things - the way the company is executing, and the spin that is put on things.

Spin doesn't last. Execution does.

Spin is good for a pop sometimes, but that's about all. Once it pops, people sell into the pop and the stock sinks again. Our PR currency would have been spent for naught.

The last ten years have caused the public to believe that rising stocks are an entitlement. "If the stock doesn't go up, all it takes is some clever words by a high mucky muck, and that will get more people to buy." Well, this is dishonest, for one thing. It might work in a long bull market (like the last ten years), with a company whose promise is in the future (like AOL in the past ten years) where it's hard to put a monetary value on things, but you know that it will be big big big. But you buy stocks for one reason only - because the company will make (enough) money to justify your purchase; if not to you, then to the person who will buy it from you later on. No matter what spin gets put on the news, it's all forgotten when the next quarter's results come out. Execution trumps spin.

If a company is out of favor, it will take some consistent execution to ultimately turn things around. Spin won't do it. Nobody will believe the spin, especially if it turns out to be wrong (as it has in the past). What we need is for the spin doctors to shut up, and just let the company's results speak for themselves. If the results are consistently positive, people will take notice. This will translate into higher stock price, and that higher stock price will stay, because people will realize that the company is really moving.

Now... as for the original question - buy, sell, or hold. I am holding. What you should do depends on your situation - how much stock you already have, what else you have, when you need the money, and what you believe the future will be. I can't answer that for you, I can only answer that for me. My answer for me is "hold".


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