Pop quiz: What do Cal-Maine (NASDAQ:CALM), Krispy Kreme (NYSE:KKD), and Taser (NASDAQ:TASR) have in common? If you recognize the names and know the stories, then you've felt the power of noise and the media.
Investors today face a wall of noise. Gone are the quiet times when an individual could slowly find stock prices from the clicking ticker tape. Now we are assaulted with streaming quotes and dedicated financial news television, websites, radio, newsprint, and magazines. Throw in the Internet search engines, and there is no end to the information we can lay eyes on.
I've been watching CNBC intermittently for several years. Is it just me, or are there big changes afoot? Even since February, when Bill Mann elegantly dissected CNBC, the format has evolved. If the current frantic pace is an indicator of the top of the bull, we are in for a major correction.
Rather than adding thoughtful content and in-depth analysis, CNBC has taken the road more traveled and kicked up the noise. Lightning rounds have replaced thoughtful discussions of stocks, and guest analysts are asked to make rapid-fire buy-and-sell recommendations on as many stocks as possible during those small segments between commercial breaks. The crowning achievement has to be Mad Money, hosted by Jim Cramer -- it's TheGong Show meets Wall Street Week in Review. On the show, Cramer rolls up his sleeves, shouts, and pouts; he gongs with moos and growls; sells are rung up at the cash register; buy-and-sell decisions fly off the screen with the speed of a Gatling gun. Who needs more than 30 seconds to analyze a stock in the 21st century? We're wired in. The stories are short, the momentum is high, and the noise is loud. These are the stocks you must buy or sell now.
Day trading is a shark that swims in this ocean of information. All a day trader needs is the biggest and fastest technology to buy first on the news and get out first on the rumor and stay ahead of the competition. Value investing is more like the spider -- throwing out a web of fundamental analysis and waiting for the juicy fly. That's at least the aim of our Motley Fool Inside Value newsletter service.
The most difficult thing to do in investing is to find a quiet spot to reflect on the value of a stock. There is too much information and too much noise. They combine to create a sense of urgency that lures investors into buying the story instead of the company.
The flood of Wall Street financial noise is designed to be dramatic and seductive. Drama moves investors to action. Have you noticed stocks don't decline in price per share? They plunge, they plummet, they tank. And equities don't increase in price -- they soar, climb to nosebleed territory, and skyrocket. And the market makes it personal. Stocks that disappoint us get spanked, embattled, and punished. It adds excitement and a sense of urgency. Momentum is created by buzz, and the investment media fairly hums like the tracks under an oncoming freight train. This noise is entertainment and is designed to increase the number of viewers. Investors should never mistake it for true insight.
Stocks that hummed
I often wonder about the last person to pay the highest price for a momentum stock. What happened to them after they bought their shares of the dream at the pinnacle? Did they get out early and cut their losses, or are they still hanging on, hoping for a Wall Street miracle? Did they have any idea of the fundamental value of the company they were buying? Or did the media finally cast enough chum upon the water to draw them in to the feeding frenzy?
Remember when the Atkins diet ruled and Cal-Maine was queen of the roost? Barely a day went by without seeing it in the media in some form. Cal-Maine sells eggs. It spent years trading at $1 to $2 (split-adjusted). By Feb. 17, 2004, it was trading at $21.57 -- that was the beginning of the end. Did that last optimistic investor see the writing on the wall and exit gracefully? Or did he wait to run with the herd on heavy volume and suffer a 28% loss four months later?
Krispy Kreme is a first-rate example of media saturation. Between newspapers covering the blocks-long lines at newly opened franchises and the minute-by-minute coverage of every price move, there was no escaping the hype. On Nov. 7, 2003, Krispy Kreme traded at $44.17. On May 7, 2004, 20 million shares changed hands (average volume 3 million) and the price dropped almost $10 from the previous day's $31.80. Was our hopeful investor who bought at the much-hyped $44 then caught up in the stampede out of Krispy Kreme? Or perhaps he waited, hoping for a turnaround but finally selling at $5.56 on March 2, 2005, unable to resist the steady media drumbeat of accounting fraud and bankruptcy worries.
Taser was masterful at manipulating the media. Not a day passed without CEO Patrick Smith appearing on Kudlow and Cramer or issuing a torrent of sound bites and press releases to the hungry media machine.
Who could resist buying as Taser soared or selling as it plunged? Who was the nameless trader who bought Taser at a split-adjusted $30.42 on Nov. 15, 2004, only to see a barrage of bad press in the following months drop the stock price to $9.16 by April 8, 2005? A lot of noise surrounds Taser, and it's not easy to sift through the hope and hype to find the true value of the company.
The quiet zone
There are stocks that don't get much media play but go about their business increasing shareholder value to little fanfare.
What have you heard recently about Omnicare (NYSE:OCR)? It doesn't make many headlines. After a steep decline in July 2004 from weaker-than-expected earnings, it has been sticking to the business of becoming the Wal-Mart of long-term-care pharmacy services. Omnicare has shown expertise at acquiring competition, and it uses an efficient business model that keeps it making money even in the face of government regulations. A value-oriented investor, familiar with the company's fundamentals and its successful track record in acquisitions, might have been tempted to buy in early August 2004 at $26.57. That same educated investor might also be aware that Omnicare may be worth holding while it patiently extends its offers to buy rival NeighborCare (NASDAQ:NCRX) and add a significant number of clients to its customer base.
We do hear the occasional news story concerning Johnson & Johnson (NYSE:JNJ). Its recent acquisition of Guidant stirred some interest. Johnson & Johnson has long been a model of ethical corporate behavior. It has also shown remarkable growth year over year while returning value to shareholders in the form of a 1.66% dividend yield and an increasing price per share. The company had serious trouble with side effects to its anemia drug, Eprex, in the summer of 2002. Value investors hunting for a bargain could've jumped in at $40.51 per share. Anyone understanding the fundamentals of the business and the strong culture of ethical behavior would have seen this as an opportunity, not a fatal crash.
The talking heads ignore Expeditors International (NASDAQ:EXPD) -- and happily so. The company has little use for analyst ratings or recommendations. Expeditors loves its employees about as much as it hates Wall Street, and it efficiently goes about its shipping business without much media coverage. CEO Peter Rose firmly believes that in taking care of business and taking good care of employees, shareholders automatically benefit. So far, he has been right.
The conference calls are presented as 8-K filings and are not to be missed. They are informative, straight-talking, irreverent views into a quiet company.
Cut the hype
Motley Fool Inside Value
, the Fool's value-investing newsletter, accomplishes that -- looking for and finding companies not likely to make investors sorry for sensational headlines. Philip Durell, the Inside Value advisor, ignores the noise of day-to-day price moves and the babble of the media. Instead, he looks at the bones of a stock -- and discovers the fundamentally sound companies that others may overlook.
Want to join in the hunt for great value stocks? Join Philip and the Inside Value community by taking a free30-day trial. Or, for a limited time, you can purchase a subscription at a25% discountto our regular price.
J. Graham owns shares of Johnson & Johnson and Expeditors International. The Motley Fool has a disclosure policy.
