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'L' Is for 'Losers' Who Felt the Tech Run Was Finished

According to one analyst, the continued rise is all too understandable.

Brought to you by the letter L


Tuesday night, when I wrote that the earnings shortfall from

Micron Technology

(MU) - Get Report

would send money fleeing back into the "high-margined highfliers," I was, of course, joking.

But what happened on Wall Street

Wednesday was no joke. With glaring seriousness, investors showed their ardor for tech and biotech names was not eradicated by recent struggles, much as I suggested a

week ago. (Ooh, my arm is sore from trying to pat myself on the back.)

Certainly, investors who watched in terror as highfliers such as


(RMBS) - Get Report


Protein Design Labs

(PDLI) - Get Report

came screaming back toward the stratosphere in the past week or so were cheered by Wednesday's snapback. But some "old hands" on Wall Street were, not surprisingly, chagrined.

The fear (such as it is) is that the action signals the broadening of market leadership evident last week (i.e., inclusion of blue-chips) will once again give way to a situation where only four-lettered stocks are in demand.

Ned Riley, chief investment strategist at

State Street Global Advisors

, said Wednesday's session "restores the notion the market is a 'capital L' market."

By that, Riley means the


represents the vertical part of the "L" and the




the horizontal.

Although it may seem Riley is trying to follow in the footsteps of

Abby Joseph Cohen's

popular "stair-stepped market" theory, the veteran market watcher says there's yet another level to his "capital L" call.

Specifically, the "five Ls," which sum up the environment:

  • Logic: Investors are chasing Nasdaq-type stocks because they offer growth in units, revenues and (in some cases) profits that are "clearly much stronger" than those expected from the S&P 500, he said.
  • Liquidity: Even if the tide was temporarily stemmed by last week's blue-chip dominance, the majority of mutual fund inflows continue to go into aggressive growth funds.
  • Levitation: "There appears to be a casinolike mentality driving valuations to levels that are unsustainable," Riley said. The 10 largest names in the Nasdaq 100 trade with an average price-to-earnings ratio of 114 times 2001 earnings, or about four times their expected growth rates, he said. "That can be considered excessive in an environment that may change from perfection/utopia."
  • Lemmings and a Lack of trading experience: "People are following after one and other," he said. "The fact common stocks are a function of dividends, earnings and assets seems to be ignored by a fairly large segment" of the investment community.

Other "Ls" I'd suggest include "love" for certain stocks, "lust" for profits, and "lament" by those who've predicted the Nasdaq's demise.

Meanwhile, back at the B2B Ranch

Shares of


rose 1.7% Wednesday but are down 19.6% for the week.

Timing partially explains why's shares are down despite the announcement Monday of an

alliance with

America Online

TST Recommends


which might have been expected to send the B2B player sharply higher.

Most "momentum" favorites were singed Monday by


(MSTR) - Get Report

earnings restatement and


controversial article about cash burn rates at certain Internet companies, including

Additionally, there have been persistent chat-board rumors that would be


by AOL (believe it or not), so perhaps some investors were disappointed that didn't materialize.

As for the deal, and AOL agreed to jointly develop and market a business-to-business e-marketplace for AOL's approximately 3 million small- and medium-sized business-user community. AOL also identified 225 "major" companies who could potentially use the service, CEO Charles Johnson Jr. said in an interview yesterday. AOL officials involved in the transaction were unavailable for comment.

Terms are as follows: will spend $20 million over the first two years of the three-year alliance to pay for the development of the marketplace. AOL will provide about 80 engineers to work with PurchasePro's people to develop the product.

It would be "next to impossible" to locate that many quality engineers that fast, Johnson said, justifying the expense. Judging by the

calculations of my colleague

Adam Lashinsky

, is getting them on the cheap, even if they're "renting" instead of "buying." also will spend $50 million over two years marketing the deal.

Perhaps because of the


article, which Johnson called "erroneous," investors were spooked at the thought of having to lay out $70 million to get this venture started (quickly).

But the B2B company will collect the first $100 million generated by the marketplace, which Johnson expects to start coming in at the end of the second quarter. He forecast it will take "a couple of years" to generate that first $100 million. Additionally, gets the first $1million of advertising fees and 70% of the first $15 million.

Thereafter, AOL and will evenly split all revenue, the bulk of which is expected to come from transaction fees and subscriptions paid by members of the marketplace.

The goal is to generate at least $120 million in annualized recurring revenue, or $10 million a month. If that occurs by Aug. 1, 2001, AOL will "earn" 2 million warrants priced at $126 per. After that, the warrants will be repriced at market levels. No more than 25% of the revenue that counts toward the $120 million goal can be from advertising, Johnson noted.

As with

past deals involving companies like


, Johnson stressed the recurring revenue element, which will continue "indefinitely" beyond the three-year term of the deal.

As you may have guessed, analysts who follow the B2B firm applauded the deal. For example,

Robertson Stephens

called it a "major win" and

Bear Stearns

said the deal is "highly positive as it will move close to the endgame of e-marketplaces: liquidity, a critical mass of buyers and sellers." Both firms have done underwriting for

I have been

critical of in the past. Not because I have a vendetta (or -- egads! -- a short position), but because it seemed investors were not using logic ("L") in assessing the stock during its big upswing.

The stock coming down this week suggests they still aren't. Unless, of course, "the game" has changed.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at .