Remember JDS Uniphase
During its heyday in 2000, JDS Uniphase closed as high as $146.53 a share (split-adjusted), only to see its price erode to a recent level below $1.80. About five years after the end of the boom, JDS Uniphase investors are about 98.7% poorer than they had been at the top. In some respects, its shareholders can consider themselves lucky, when compared to those of WorldCom, another Internet backbone firm whose former owners had been completely wiped out by corporate bankruptcy.
With the boom times over, it became easy to get lulled into a false sense of security that the Nasdaq bubble had been a once-in-a-lifetime phenomenon and that the siren song of unstoppable growth would never again hold sway over rational valuations.
Of course, it wasn't that long ago that Krispy Kreme
The carnage still continues elsewhere today. Sirius Satellite Radio
When perpetual perfection and boundless, rapid growth are required to justify a company's stock price, the result is a scenario that Alan Greenspan has justly labeled "irrational exuberance." Fortunately, there's a treatment for investors suffering from that particular malady. The treatment lies in deciding to become a value investor -- in determining a company's intrinsic value before buying and then only investing if the company's price is below that value. Doing so, however, often takes quite a bit of objectivity, patience, and confidence, as it requires acting contrary to rising bubble-level prices and in the face of the public mania that surrounds them.
Shopping for value
When the Internet bubble neared its peak as 1999 drew to a close, pipeline company Kinder Morgan
Unfortunately, at a recent price of $78.01, and at about 24 times its trailing cash flow, it's no longer as cheap as it once was. For bargain-hunting investors who had uncovered Kinder Morgan when everyone else's attention was on flashier companies like JDS Uniphase, the past few years have been quite rewarding. Kinder Morgan investors have seen their investment grow by about 285% during the early part of this millennium.
Of course, the past is not a prologue for the future, or else the bubble would never have burst, and Kinder Morgan would have remained a perpetual bargain. Driving forward while looking into a rearview mirror virtually assures problems, as does investing based on past price movements. Some values may be vanishing, but to quote Philip Durell, advisor for Motley Fool Inside Value, "I won't concede that there was a time -- ever -- when a bargain or two didn't lurk somewhere in the market. Value is out there, even when whole groups of stocks get ahead of themselves."
One place to look for value is in companies that make up the group that Philip calls the Fallen Angels. These are companies that were once the darlings of Wall Street, but who now have been discarded and virtually left for dead.
There may be very good reason for the market's dislike of the firms. Take the pharmaceutical industry, for example -- specifically Merck
When Merck announced the surprise withdrawal of Vioxx, its arthritis painkiller, amid evidence linking the compound to heart problems, the company swiftly fell from grace. Reduced revenues and lawsuit fears added fuel to the fire that was already being stoked by competitive pressures. With Merck's relatively weak pipeline and aging arsenal of compounds, there had already been questions as to whether the company could stave off pressure from generic manufacturers such as Mylan Laboratories
In spite of its recent tumble, there are indications that Merck is a Fallen Angel that might yet recover some of its past greatness:
- An FDA Advisory panel recommendation that Vioxx could return to pharmacy shelves;
- A dividend yield of more than 4.5% (that was recently maintained by the company's board); and
- Estimates that indicate that the dividend appears sustainable, in spite of the company's recent problems.
Merck is no longer the AAA-rated, virtually invulnerable firm it once was. For an investor looking for a Fallen Angel just starting down the road to recovery, however, Merck just might be worth investigating.
When a company requires tremendous growth and perfect execution from now until forever to justify its current price, the odds are very strong that the company's business will eventually stumble and its price will plummet. The dustbin of history is full of such firms. On the flip side, when a company's price is so low and its prospects considered so dismal that the market is predicting that its end is in sight, value investors like Philip over at Inside Value just might begin to salivate.
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