Rogue Missives
Rogue Missives
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1996: The Good, The Bad, The
Hyped Never has so much success been enjoyed so little. The stock market enjoyed yet another banner year -- the Dow has now risen 68% in the last two years -- and yet the financial press, mutual fund managers, and market gurus spent most of their time insisting that the bear was just around the corner. How many times were you told that at the first sign of a bear market there would be a flood of redemptions by novice investors cashing out of their mutual funds causing the biggest bear market since 1929? Even though the doomsayers never found the doom they were looking for, their comments certainly created a climate of anxiety during the second half of the year. Federal Reserve Chairman Alan Greenspan's public voicing of concern over possible "irrational exuberance" in equity markets rattled everyone, if only for half a trading day. And so, though it was a year of much prosperity for investors, a year of marginally improved economic prospects for most American workers, and a year of continued -- if slightly slower -- expansion for American business, it was also a year in which skittishness was the financial establishment's dominate emotion. Without further ado, our first annual Rogue Awards. 1996, we knew you well. Individual Stock Heroes & Goats MOST IMPRESSIVE RETURN FROM THE DEAD: IBM. It's obviously overstating the case to say that IBM was ever dead, but 1996 was the year in which the market awakened to Big Blue's revival. Remembering the doldrums of the late 1980s and early 1990s when IBM was laying off thousands of workers and investors were clamoring for radical changes in the firm's structure, the newfound respect the company enjoys seems astonishing. Under CEO Lou Gerstner, IBM has positioned itself solidly athwart the fabled Infobahn, while at the same time maintaining its strengths in more traditional fields. Here at $150 and change, IBM stands within 15% of $175 7/8, a number many thought it would take years to see again. Runner-up: AMERICA ONLINE. The press's continued assault on America Online's pricing scheme drove the stock down from its high of $71 in May to the low $20s near year-end, causing the company to break with its established model and offer unlimited flat-fee access to its service. Although it remains to be seen how this move will affect America Online's financial model, customers who once spent their time complaining about the price of access now spend their time whining about how they cannot get online. America Online also dumped accounting practices called "dubious" by the Street, although many still focus a disproportionate amount of attention on the Vienna, Virginia-based company's cash flow statements. Ironically, after America Online made its shift, the Baby Bells started crying about how Internet traffic was jamming up their phone lines, causing them to float the idea of per-minute local access charges. MOST IMPRESSIVE ATTEMPT TO RETURN FROM THE DEAD: ZENITH. Down and out since the television became unprofitable, Zenith has twice seen its shares run up in excess of $20 a stub on announcements of Internet-related gadgets and digital video devices. In early May the company announced some cable modems, partnering up with U.S. Robotics among others. Talk about the potential for digital video players and Internet-enabled televisions helped to send the shares skyward, only to return to earth here at year-end. BIGGEST BLUE CHIP DISASTER: EDS. There was a lot of competition here, from Computer Associates to Kellogg to Black & Decker, but when the foot hits the pedal it was EDS that probably was the biggest disaster to professionally managed money. The premium name in outsourcing announced that it would not be able to continue 20% annual revenue and earnings growth in the fourth quarter of this year and first quarter of next year, leading to a steep drop from the $63 level it hit earlier this year. Here at $42 1/8, just near the 52-week low, no one has yet to climb back into the shares. WORST CORPORATE FINANCIER: RONALD PERELMAN. Back when leverage buy-out was a hot word, Perelman was king. These days, investors unfortunate enough to be co-owners with him are getting slammed in company after company. Marvel Entertainment is probably the biggest bust, down around $2 now that the company has proposed filing for bankruptcy, but Coleman and Autozone were not exactly winners in 1996 either. And people are still climbing aboard recently public Consolidated Cigar, another Perelman special. Perhaps we shall revisit Consolidated in the worst of 1997? BIGGEST EXPANSION OF P/E MULTIPLE: INTEL CORP. If you gotta say one thing about Intel this year, man the stock's P/E increased. After years of hanging tough around 15 times trailing earnings, investors finally realized computers were not going the way of buggy-whips and ice trucks. After years of solid profits, high margins and a market share that eclipses 80%, Intel Corp. pretty much runs a dream business and has finally earned a multiple commensurate with that fact. Runner-up: DELL COMPUTER. The personal computer box makers have traded at 11 to 13 times forward earnings for years, but no more. This was the year falling chip prices made people realize that Dell's direct sale model is superior to selling through the conventional retail channel and that the company had a license to print money. Buying back stock like crazy, it still ended the year with more than a billion of cash in the bank. Can it keep its expanded multiple? If the direct model keeps knocking out the hits, it certainly looks like it. WORST MANAGEMENT: COMPUSERVE. These guys should be legally barred from running a company. How can you dump untold millions into a starter service like WOW! only to pull the plug on it nine months later when expectations are not up to snuff. Come on, it was a Windows95 only service -- what did people expect? You should have known when management told you WOW! was a simple online service people could start on but had no plan to graduate them to CompuServe that the concept basically sucked. And while Rome was burning, CompuServe fiddled away its core business. Now it is reborn as a corporate online service, having been thoroughly trounced in the consumer market. Yeah, right. HYPE & SCAMS LARGEST DISCOUNT OF FUTURE PROFITS: THE YEAR 2000 STOCKS. Contrary to popular opinion, these companies are not named Year 2000 stocks because that is how far into the future they discount potential profits. Companies like Viasoft, Zitel, Acceler8 Technology, Ciber and TSR all became household names as hype about the coming crash of all computers made the rounds in late 1996. Apparently, a few geniuses writing in COBOL programmed computers with six digit date fields, meaning that when they read 00 in a few years they will think it is 1900, not 2000. Estimates currently say it will cost $600 billion to fix, and investors are piling into the shares of companies that advertise the magic bullet. Tulipmania is an oft-heard expression. MOST ADEPT PROMOTER: ROBERT KOPSTEIN. Kopstein, CEO of Optical Cable, made himself the true heir of P.T. Barnum when he took his company public via press release. After his initial attempts at garnering public interest in Optical failed, Kopstein sent out a mailing advertising the company and emphasizing its boundless prospects for the future. Improbably, investors bit, propelling the stock to a high of $34. Optical has since dropped to $11 1/2, but since it went public at $2, it remains among the most successful IPOs of the year. All of this occurred despite the fact that there is not much evidence that Optical has anything resembling a competitive advantage in its market. Kopstein has continued to use the laser printer and the Internet to excellent effect, sending out what often seems to be a press release a week, inveighing against short sellers, touting the company, and attacking his critics. The most recent missives have compared the company's financials favorably to those of Netscape and given earnings estimates out to the year 1999. U.S. Steel, it ain't. MOST CHALLENGABLE BUSINESS MODEL: HFS. Here's a great gig. Imagine you own a company with stock that is trading at more than 20 times earnings. All you have to do in order to grow sales is to acquire companies at less than 20 times earnings in stock, and watch your market cap expand by more than your acquisition price when the deal is done. How do you convince people that it will work? Just tell them that you will be able to cross-market goods and services among the various businesses you are buying. Remind you of Student Loan Marketing in the '60s? You are not alone. Runners-up: REPUBLIC INDUSTRIES, FLORIDA PANTHERS. BIGGEST PENNY-STOCK SCAM: COMPARATOR SYSTEMS. The fingerprint technology concern enjoyed a momentary market capitalization in excess of a billion dollars when its ill-fated press release hyping the fact its technology was being looked at by Mastercard hit the wires. Trading was halted for a while as the SEC took a closer look at things, and the stock eventually opened down at close to $0, crushing many an unwary penny stock investor. Runners-up: CURTIS MATHES, SYSTEMS OF EXCELLENCE, TELETEK, OMNIGENE. Frankly, there were a lot. Whether it was Curtis Mathes trumpeting their Web TV units, investigations of stock manipulation by promoters of Systems of Excellence and Teletek or radio-hype driving shares of Omnigene (with its apt ticker, OMGD, or Oh, My God!), it was a busy year for stock promoters. The normal procedure? Start the hype in a newsletter or on a radio show and watch it transmute over to the Internet. FROM THE IF IT LOOKS LIKE A DUCK, AND QUACKS LIKE A DUCK FILE... Diana Corporation was a meat-packing company that acquired a firm that made Internet switches. Within a few months, the company's stock price rose to $114, a rise driven not -- as some press outlets would have had it -- by hype on the Internet, but rather by what seemed to be remarkably judicious buying by people in the know. Diana's switch, though, has yet to become a generator of earnings, and skepticism about the product and about the company's management drove the stock back down to the $20 level. A lot of investors who had gotten caught up in the frenzy lost their shirts. A good excuse to go back and read Peter Lynch. INTERNET FOLLIES STOCK MOST OFTEN USED AS AN EXAMPLE OF ONLINE HYPE: IOMEGA. The Roy, Utah-based maker of removable storage devices continues to make headlines whenever the stock price moves more than five percent, drawing comments about Tulipmania and the South Sea Bubble. Certainly, investors who bought at the $55 high in May are still licking their wounds, however, the company did start the year at a split-adjusted $5 3/4. INTERNET ACCESS HYPE: CAI WIRELESS. In a few short trading sessions, CAI Wireless rose from $5 to $17 based mainly on prospects for its high-speed wireless Internet access. Trading now at around $1, investors apparently failed to properly price in the risk that this Internet access was still in trails and would not be commercially released for quite some time. Bell Atlantic and NYNEX telling CAI Wireless to take a hike was the final shoe to drop for this wireless cable concern. Runner-up: INTERNATIONAL AUTOMATED SYSTEMS. In a fax barrage worthy of the most able of hypesters, International Automated Systems told the world about their new high-speed modem that could achieve speeds that had about ten zeros after the first number. However, when it came time to demo the darn thing, management cleverly said they could not risk public exposure of their technology as a number of big companies were examining it in independent tests. But they were happy to show off their supermarket scanners. To date, the company, whose stock is down from $55 to $5, has yet to say word one about the big contracts for its proprietary technology they were talking up. Our only regret? It trades on the Nasdaq Small Cap market, and therefore cannot be shorted. GENERAL INTERNET HYPE: NAVARRE CORP. Back in the crazy Internet hey-days of May, Navarre Corp. announced the Net.Radio Network and surged in excess of $20 a share. The distributor of "enhanced audio CDs" was the latest in a flurry of companies to hop on the Internet bandwagon, even though their core business had nothing to do with such an undertaking. You can grab shares for $2 and change now. MOST OVERHYPED INITIAL PUBLIC OFFERING: YAHOO!. Perhaps the most notable IPO of the year was Yahoo!, which went public despite having just $8 million in revenue and no earnings and which, for one glorious moment, was valued at $1 billion. Yahoo!'s stock price has since come crashing back to earth -- to $17 1/2 from $43 -- but the company itself has not floundered. There is, of course, the nagging question of where the revenue is going to come from... THE VANISHING INITIAL PUBLIC OFFERING AWARD: WIRED VENTURES. Wired Ventures, the company that publishes Wired magazine and the website HotWired, was set to be taken public by Goldman Sachs this summer, valued at something like $400 million. This was rather remarkable given that the company was losing money at the rate of $2 million a month, and that the $400 million valuation seemed based entirely on Wired Ventures' prospects as an Internet company, even though it was the Internet portion of the firm that was the money-loser. The first IPO was withdrawn when the market suffered its midsummer blues, but the company rescheduled the offering for the late fall, only to cancel that because of a lack of investor interest. Don't believe the hype. THE GILDED CIRCLE AWARD: The World Wide Web may represent the future of world communications, but it's far from clear that anyone has really figured out how to make it profitable. Web advertising proliferated in 1996, and banners became as ubiquitous as radio jingles. But a study published earlier this year showed that of the 10 companies receiving the most in ad revenue, six were among the 10 companies spending the most on advertising. CKS Group, an Internet advertising agency, is the only public company that actually makes a substantial amount of money selling Internet advertising without buying a heck of a lot of it at the same time. BIGGEST ON AGAIN, OFF AGAIN ONLINE PRESENCE: MICROSOFT. How could we let a retrospective of 1996 end without mentioning the Redmond titan at least once? And it was, in fact, a stunning year for Microsoft. Between the failure of the original Microsoft Network and the less-than-anticipated sales for Windows 95, Microsoft seemed open to challenge as the year began. But the combination of Windows NT, the revival of MSN as a Web-based network, the introduction of MSNBC, and the Internet Explorer browser, all of which came on top of the continued diffusion of Microsoft software into every computer in the world, made investors believe again. Bill Gates's decision that the Internet represented the future meant, in a sense, that Microsoft would make the Internet the future. Where do you want to go today? GENERAL MARKET "EXUBERANCE" THE CORRECTION THAT WAS (NOT): When, in mid-August, the market stumbled and fell a couple hundred points over three days, the press seized upon this as the long-awaited correction. Instead of providing a historical context that would have made it clear how unimportant the drop in the market was -- both statistically and psychologically -- the press did all it could to overplay the story, thereby feeding doubts about the market's strength. Most tellingly, the media's main hook was the idea that new investors, convinced that stocks could only rise in a steady and unwavering line, would panic at the first sight of trouble and sell. Yet money continued to come into mutual funds, after the briefest of pauses, and individual investors stayed in for the long term. It was, in a sense, a story that existed almost solely on the pages of the Wall Street Journal and the studios of CNBC. Near the bottom, a series called The Buy & Hold Apocalypse? ran here in the Motley Fool, championing the buy and hold approach at its darkest hour. MOST ANTICIPATED EVENT: FEDERAL RESERVE RATE HIKE. Every time the Federal Reserve met during the first half of this year, the markets reacted as if an interest rate hike was in the offing. When unemployment fell to 5.1%, some analysts suggested that the Fed should go ahead and raise rates immediately without waiting for its next scheduled meeting. But the Fed never acted. Aside from a quarter-point drop in the Fed Funds rate in January, Alan Greenspan sat on his hands and let the economy continue its steady -- but still slow -- climb. The overwhelming empirical evidence suggests that inflation is so low that interest rate cuts, not raises, were in order in 1996, but Greenspan's hawkishness on inflation is such that every bit of good economic news was read by the markets as a sure sign that interest rates would be going up. It was a year, truly, in which only no news was good news. BEST QUOTE FROM A FED CHAIRMAN: ALAN GREENSPAN. The phrase "irrational exuberance" will live in infamy from here on out. BEST DOWNSIZING HORROR STORY: SUNBEAM-OSTER. Al Dunlap, who acquired the nickname "Chainsaw" for his savage downsizing of Scott Paper, was named CEO of Sunbeam in April, after which the stock's price doubled almost immediately (much to Dunlap's joy, since he had invested heavily in Sunbeam just before the announcement of his appointment). Dunlap came in saying that he was going to reinvent the corporation by getting rid of all the dead wood. He was true to his word. Last month, Dunlap announced that exactly half of Sunbeam's workers would be let go, and that 18 of its 26 manufacturing plants would be shut down, leaving just four plants in America. Dunlap has yet to show that he can manage a company in prosperity, or that he can position a company to succeed without being taken over. But you can say this for him: he does not pretend to be less severe than he is. BEST DOWNSIZING IDEA: GIVE DOWNSIZED WORKERS STOCK. Jim Cramer wrote an excellent column in the New Republic earlier this year floating a particularly exciting notion -- allowing downsized workers to enjoy the fruits of their unemployment. Cramer argued by giving downsized workers stock as part of their severance package, they could actually benefit as much as shareholders from a revivified corporate entity. Now, if only the companies would pick up on this notion. MOST IMPORTANT MERGER (Runners-up): BOEING/MCDONNELL DOUGLAS and TIME WARNER/TURNER BROADCASTING. The most obvious candidate for this award would be the recently announced merger of Boeing and McDonnell Douglas, since it will effectively make Boeing the dominant player in both the commercial aircraft and aerospace industries. Alternatively, one might pick the merger of Time Warner and Turner, a merger that testifies to the growing consolidation in the media world. As The Nation termed it in a special spring issue, we live in what might be called a "national entertainment state," and it's a state run by fewer and fewer companies. Or, as The X-Files put it, the new structure governing our lives is "the military-industrial-entertainment complex." Winner: MCI COMMUNICATIONS/BRITISH TELECOM. And yet the impact of mergers on the dissemination of information is hard to measure, since it's far from clear that large corporations have ever been founts of alternative or independent commentary on the world. And so the most important merger was one that was a little less glamorous: the MCI-British Telecom deal, which represented the first time that a foreign company acquired a U.S. telecommunications company. The deal testified to the increasing irrelevance of national borders and the necessity for international mechanisms to deal with a world that, at least for multinational companies, is more and more just one world. LABOR & POLITICS MOST IMPORTANT LABOR DEAL: The contracts signed by the United Auto Workers with Ford and Chrysler guaranteed that the number of workers employed by these companies will not dip below 95% of the current staffing levels over the course of the contract. The UAW did make certain concessions on the question of outsourcing, but the guaranteed workforce levels represented an important step toward a greater integration of the union in company decisions. MOST UNIMPRESSIVE POLITICAL DISCUSSION: The 1996 presidential campaign was notable primarily for the complete absence of any substantive discussion of America's economic future. At a time when globalization is effecting genuinely dramatic changes in corporations' attitudes toward labor and government, and when serious thought has to be given to the future of the nation's industrial base, Bill Clinton and Bob Dole avoided anything that might smack of reality. Dole offered only a fabulistic tax cut and imaginary numbers, while Clinton just kept insisting that everything was all right. Only Pat Buchanan seemed interested in speaking to the anxieties most Americans continue to feel about their economic futures, and he did so in a way guaranteed to produce answers better suited to the 1930s than the 1990s. MOST NOTABLE ELECTION: John Sweeney's ascension to the head of the AFL-CIO marked an important change in the potential fortunes of American organized labor. For the first time in more than two decades, the AFL-CIO is committed to organizing new workers and to rediscovering a sense of militancy that had been drummed out of it by years of slack leadership and state hostility. Sweeney has yet to achieve the kinds of sweeping changes he has promised, but given the fact that real wages for the average American workers are lower today than they were in 1973, his election was an important first step. THE MOVEMENT THAT WASN'T: 1996 was the year in which the phrase "stakeholder capitalism" made its first real appearance in America, but it was also the year in which stakeholder capitalism as a concept failed to grab the public imagination. Loosely speaking, stakeholder capitalism is predicated on the idea that a company's workers and the communities in which its facilities are located have an important stake in that company's future, and that they -- as well as the company's management and shareholders -- should have a say in how the company is run. Given the increasing reliance of corporations on tax breaks and subsidies in order to build new plants or to relocate, some version of stakeholder capitalism seems to make enormous sense, but it was an idea that, at least in 1996, failed to catch hold.
-- Jim Surowiecki (Surowiecki), a Rogue |
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