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Every few months, the author of this column answers questions from readers who implore, "Hey Modelman!"
What do you think of the
scandal? Is the stock a buy now?
ChoicePoint's business is to discover, acquire and maintain records on everyone so that they can be used to deny credit, employment, insurance or admission to myriad venues.
Since being spun off from
in 1997, its shares advanced tenfold on the wings of authorities' quest to categorize customers and citizens by creditworthiness. The idea is that in a nation built on debt, companies and governments need as much data as possible about individuals to build accurate actuarial tables aimed at predicting the potential payback. Fair enough.
But identity profiles are built on trust, and last month we learned that ChoicePoint violated its customers' confidence in a big way: The company was a victim of an absurdly easy-to-spot Nigeria-based identity scam that compromised 145,000 customer profiles.
Not long afterward, we learned that rival LexisNexis, a unit of the Anglo-Dutch data conglomerate
, likewise placed more than 30,000 customer profiles in the hands of scamsters. And now we hear that
Bank of America
has lost the details of 1.2 million government customers, probably to identity thieves.
If Willie Sutton -- who famously said he robbed banks because "that's where the money is" -- were alive today, he would undoubtedly be preying on companies like ChoicePoint. Access to Social Security numbers and dates of birth are keys that open the portals to our digital identities. Federal regulators and legislators are now responding and making noises about reining in the data bureaus' power. And the company itself said it was stepping back from the most heinous (and coincidentally, low-margin) personal-data work.
The company said it would lose less than 5% of its business, and that may be true. But it's hard to put the genie back in the bottle. Trust has an ethereal quality, and it isn't easily rebuilt. My guess is that ChoicePoint -- which sold off from a high of $47.95 to a low of $36 on its bad news, but has since rebounded to about $40 -- will struggle going forward. Even after the recent decline, it's not cheap, with a forward price/earnings multiple of 22 weighed against uncertain, but definitely slowing, forward growth estimates of less than 15%.
I could be proven wrong if customers decide to turn a blind eye to these violations of trust. But I would stay away from this company. Just as socially responsible investors of old have profitably steered clear of tobacco and alcohol manufacturers, it seems that investors intent on taking a stand against privacy invasion could likewise take a successful stand against personal-data distributors.
Two months ago, you wrote that the cycle guys were bullish, and they got the turn right. What's their view now?
That column ran the same week the major averages reached their bottoms for the year so far. In an interview, Tom McClellan told me his cycle work forecasted a strong rally that week, followed by a decline into a nine-month cycle low in June, then a top in August-September. So put a W on the board for the cycle analyst.
Now McClellan sees crude oil making a second spike up that echoes the gains made last October. He looks for a one-month decline in the commodity into early April that will be accompanied by a concomitant rise in equities. (To forecast oil, he uses the price of gold lagged by 11 months for reasons that are somewhat obscure, but the methodology seems to work.)
If that does occur, he sees the potential for impressive buoyancy in equities, as there appears to be sufficient liquidity -- that is, money sloshing around that can move into stocks from commodities. One metric he uses is a proprietary version of the
New York Stock Exchange
advance/decline (A/D) line. When it's rising as it is now, the forces of supply and demand favor buyers.
Importantly, he said, the market doesn't crash when the A/D line is rising, and recently it hit an all-time high. In contrast, before the 2000 bear market erupted, the A/D line had topped in 1998 and had been falling for two years as money was being funneled into fewer and fewer stocks -- largely, big-cap techs.
If the market follows past cyclical patterns, McClellan further forecasts that small-cap stocks will lose their dominance over large-caps. That means that bigger company shares will either rise faster than the smaller company shares, or, in the event of a broad selloff, decline less. His bet is that a decline in crude oil prices will end in mid-April, with energy bears proclaiming that the commodity will go back below $40. He then sees crude rising back toward $60 toward the end of the year.
Funny how you didn't mention
gross and net margins, revenue and profit growth, but did mention
and your beloved
column. It would have blown your argument that Google is overvalued. Google is massively profitable, while most of the dot-coms didn't have any profit (and some didn't even have revenue!). ... So it's easy to build a search engine, ehhh? Well, it's easy to brew a cup of coffee, too, and look at
. They have no competition anywhere near them despite such a simple and replicable product. Point is, the product is the easy part. It's everything else in building a business that's difficult.
It is true that so far Google has been phenomenally successful at monetizing search, an effort that eluded
for years, as well as so many prior competitors, like Inktomi. But you still must answer two questions for yourself: Is the business model sustainable? And are investors overly optimistic about the sustainability of current income streams?
built an online auction community for which there was virtually no substitute once it gained sufficient size to beat back attempts by Amazon and Yahoo! to get into the business. Yet while people have adopted "googling" into their lexicon to mean "searching for information online," there is truly no way for Google to ensure that it can monetize the concept forever. And even if it could, the current price -- 15 times sales and 125 times earnings -- forecasts preposterous earnings growth well into the next century.
Indeed, in an interview with
on Saturday, canny value investors Ben Fischer and Cliff Hoover of NFJ Investment Group reported that their work suggests that Google is priced to discount actually the next 2,000 years worth of earnings. That view doesn't dispute the notion that Google is a fine and successful company -- only that overly enthusiastic buyers are paying too much for it at present, much like paying $400,000 for a really nice Mercedes-Benz sedan that's really only worth $75,000. That is, Google may be worth a lot -- but nowhere near that much. And if the growth appreciably slows, the price will be slammed.
At the time of publication, Markman was long Symantec, although positions may change at any time.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment research service, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. He also writes a weekly column for CNBC on MSN Money. While Markman cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
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