1. Lack of bargaining power: PSINet (Ticker: DEAD)
On the PSINet Bandwagon, 1/10/01
Price 1/13/00: $ 1.44
Price 4/01/02: $ belly up!
In January 2001, I wrote a fairly glowing story stating that I believed that PSINet would survive the collapse of the telecom sector. I recognized and spelled out the tremendous risks, but this warning turned out to be insufficient: The stock skyrocketed, and then quickly collapsed. I based my beliefs in the company upon two elements: 1) PSINet was the top-rated service provider, and 2) PSINet had huge physical assets it could sell in order to pay down its debts. Less than four months later, PSINet was bankrupt. Key to my misjudgment of PSINet's situation was that companies selling assets in a position of weakness rarely get anything close to full value. The firesale prices PSINet had to accept were insufficient to cover its debts, and it collapsed under the weight. -- Bill Mann (TMF Otter)
Price 1/13/00: $208.03
Price 4/01/02: $ 18.68
This is the classic case of a great company with a terrible stock. Yahoo!'s service to consumers was (and is) phenomenal, and the company is very well run. But good investments require paying the right price, and Yahoo! the stock was in the stratosphere. The company's high growth and strong cash flow certainly justified a premium multiple of some type, but nothing close to the 100x and 200x multiples to free cash flow the stock was garnering. Another lesson here is that even great companies with seemingly endless growth possibilities almost inevitably run into seasons of declining earnings. Business is almost inherently cyclical, even in non-cyclical sectors, and it's just unreasonable to count on endless growth to justify a stock price. My biggest lesson overall here is the importance of requiring a margin of safety in the price I pay -- no matter how great the company. -- Matt Richey (TMF Matt)
Price 8/22/00: $92.88
Price 4/01/02: $ 7.99
The lesson is that semiconductors are a cyclical business. Rambus' business model involves royalties on sales of semiconductor that contain its intellectual property. In 2000 and for now, this means a few percentage point royalties on certain dynamic random access memory (DRAM) for computers. In the August 2000 Duel, I estimated a large Rambus share of a DRAM market growing from about $20 billion in 2000 to about $60 billion to $100 billion in 2005. This rosy scenario assumed no recession at all -- not even minor pullback from the torrid phase of ignoring the possibility that businesses had just invested heavily in a cycle of new hardware and software, the industry might enter a cyclical downturn, and not every major DRAM maker would license its IP. Depending on your estimates, the market fell to $12 billion in 2001 and not every company rolled over to pay royalties. Rambus' potential return is forever lowered by these years of a reduced market for its IP. -- Tom Jacobs (TMF Tom9)
Price 2/15/00: $99.91
Sold 5/04/01: $22.41
When the Rule Maker Portfolio Team decided to sell its JDS Uniphase holding in May 2001, Matt Richey cited the lesson that you really do need to understand the businesses in which you invest: "Not only are optical components difficult to understand in and of themselves, but JDS Uniphase is the product of numerous acquisitions, which makes the company overall an even tougher nut to crack. Further, even at its much-reduced valuation, the company is still priced for significant growth. Richard McCaffery summed up our thinking on the company in his article, 'Who Should Invest in JDS Uniphase?' Maybe you, if you understand the company and industry, but not us."
Price 3/13/01: $22.42
Price 4/01/02: $15.84
But with dividends: -5%
I'm a sucker for the falling knife deal. I just have to remember to wear bigger mittens when I try to catch it on the way down. See, I knew AT&T was damaged goods when I took up the bullish case for the stock last year. Long distance was an industry as enticing as tying a really long string to a pair of Dixie cups. But I lunged for the knife anyway because I figured AT&T had so much more to offer. Between its cable, broadband, wireless, and business services offerings, I truly thought I was making a great value call on AT&T.
Well, I guess I pigged out at the vulture's buffet. The stock's shed a third of its value since the Duel and between its various struggling subsidiaries and mountain of debt, that knife blade hasn't dulled any. -- Rick Aristotle Munarriz (TMF Edible)
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