With the performance of the stock market over the past week, I'm torn between elation and embarrassment.
On the one hand, I'm happy as a clam that a large number of my holdings woke up and recovered a decent chunk after underperforming for the past year. The "noise" level created on behalf of the New Economy hype had -- and still has -- created enormous opportunities in a number of terrific companies whose only fault seems to be a long history of high profitability.
For this crime, the punishment has been falling stock prices, a distress that was only partially relieved last week. But a 20% move is still a 20% move -- and is gratefully accepted whether it occurs in 48 hours, or 12 months.
On the proverbial other hand, this is embarrassing. I work in a sector of an industry that generally attempts to pride itself on diligence and the pursuit of some semblance of rational behavior. On the basis of the latter, last week was pathetic. As ridiculous as the spread between "Old" and "New" became a week ago, there also is something inherently unsettling about the knee-jerk flood of money into a sector labeled "Old Economy."
First of all, it is patently absurd to even imagine creating sectors such as an Old Economy and a New Economy. I've seen a lot of labels in the investment-management business get generalized to the point of absurdity, but this is undoubtedly the worst example. If the "Internet" is viewed as a new and very useful business tool accessible to all (and not as a new species or the arrival of the messiah), then by definition, those previously defined as either Old or New must become indistinguishable. Such labels are merely convenient tools to sell either securities or subscriptions to financial magazines to those seeking to chase yesterday's performance.
announcement that it is putting its Internet-only bank,
, up for sale is a classic example of this. Bank One management fell under the spell of the siren song that "this is really different," and started an Internet-only bank because the "Old" bank obviously couldn't get it.
An undisclosed sum (but estimated to be well north of $100 million) later, the gig is up and the conclusion obvious. Neither consumer customers nor business customers give a hoot whether they get what they want (price, efficiency, service, flexibility) from a telephone, an ATM or the Internet. They simply want the ability to do what they want at all points of the distribution system, whenever the mood strikes them. In other words, clicks and mortar wins out, as
has close to 2 million customers who use online services, while the e-service from Bank One didn't even crack 100,000 customers.
When Fantasy Meets Reality...
I've been on a little "visit the management kick" lately, and guess what the conversation shortly turns to?: B2B. What I'm hearing almost universally is that nothing like 100% of industry revenue is going to be run through some industry marketplace, even though the valuations of said marketplaces seem to imply that. I'm also hearing universal disdain for the idea that a third party is going to get a piece of every transaction that is run through an exchange, and the evolving ownership changes in the
Internet-buying venture seem to echo that. That means the valuation model for the B2B world is quickly becoming a 40 times price-to-earnings software and services model -- not a 40 times price-to-sales model that gets a penny whenever a participant breathes.
As an example,
dominates the aluminum wheel industry, serving original equipment manufacturers, as well as (tout coming) the soon-to-be burgeoning market for aluminum auto parts. They participate in a business that is so mundane, it would send most
subscribers clicking away. But because of their ruthless attention to costs, terrific engineering and slavish customer service, they get 10% after-tax net margins.
I think most of us can agree that even a Web-ordered car needs wheels to leave the lot or to roll off the truck that delivers it to your house. And I think Superior will continue to gain market share because, while competitors can quote a 10% lower price, by the time only 70% of the order shows up at the assembly plant, the cost comes in about the same, due to the inevitable last-minute modifications to satisfy customer demand. The point being: price is not always everything.
Lastly, almost all chain-store sales and
1000 companies already are linked to their suppliers via an electronic data interchange, which itself feeds into supply-chain software. From my fairly in-depth survey of 15 manufacturing companies over the past month, the conclusion was again almost universal. Yes, a Web-based link is more flexible. It not only enables flexibility in customer-generated ordering, but can make more data more widely available to more people in the company.
But this is an incremental improvement over what currently exists, and is not being looked at by most corporate offices as a cost-saving or sales-enhancing "revolution" ... except in certain companies' press releases. (If your company has a different story, please
let me know).
If there is one thing U.S. corporate management is good at, it is jumping on a trendy bandwagon, throwing lots of money at consultants and generally working a great idea into commonplace knowledge. To suggest that 247 publicly traded Internet companies and another 100 infrastructure providers understand the Internet, and that no one else does, is silly. In three years, the Internet will be so intertwined in everything we do, that it will be barely worth a mention. Hence, we hereby dispense with the "Old" and "New" labels and resolve to click away ourselves if we see its usage.
...And Nutty Becomes the Norm
Circling back to the opening paragraph, while my twin girls are still shy of two years, I live in fear that someday they will ask me: "Daddy, I don't understand how
can be 44 on Tuesday and 54 on Friday in the absence of any news in a semi-efficient market."
"Wow" is about as good a summation as I can come up with, and is as succinct and accurate as anyone can be in 900 words as to why the mind armed with a trading desk acts the way it does. But I hereby wish to thank those with attention spans of 30 days or less for the opportunities, and in the meantime, I'll restudy my
videos for more answers.
I'll close with a paraphrase of a recent article in the
about the potential sham represented by the valuation of
, a description that seems to apply to a lot of investors today:
______________ (a fill-in-the-blank momentum stock) shareholders are behaving much like the characters in the Wizard of Oz, before they meet the Wizard. Some, like the Scarecrow, have no brains and invest without looking. Others, like the Lion, have no courage and follow the heard. Others are like the Tin Man, who has no heart. They do not care what their company does, but they buy and sell its shares back and forth. Beware the wicked witch who seems to enjoy cutting stocks in half with regularity.
Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Superior Industries and Banc One, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at