The Nasdaq crash was expected in many quarters. But only a tiny number of stock market skeptics foresaw the equally gruesome meltdown in large energy stocks such as Enron ( ENE) and Calpine ( CPN). Who were the prescient few? A handful of short-sellers, people who seek to profit from a stock's decline, and a couple of independent analysts. But investors of all stripes can learn from their willingness to question Wall Street's assumptions. First off, why would anyone have thought about betting against the likes of Enron and Calpine? Neither company has missed earnings targets recently. In fact, Calpine confirmed Friday that it still expects to post 26% earnings growth next year. Both firms' profits growth has been outstanding for many quarters. Neither sported the stratospheric valuations that were common in the tech sector. Unlike tech, the energy segment of the economy isn't in recession and appears to have solid long-term growth prospects. What's more, both companies are leaders in their field. Enron is the world's dominant energy trader and Calpine excels at producing electricity from its cutting-edge gas-fired plants. Both are adored on Wall Street. Sell-side analysts have long backed both companies with unabashed enthusiasm -- and continue to do so even as their stocks have fallen over 60% from their 52-week highs. But none of that bothered the doubters -- not one iota. Why?
Checking the Bottom LineOne of the first skeptics on Enron was James Chanos, head of New York-based investment firm Kynikos Associates, which has sold short shares in Enron. Chanos started looking at the giant energy trader toward the end of last year, when it was trading at over $80. What caught his attention was Enron's low return on capital. Sure, the company was posting impressive earnings-per-share growth -- over 30% at the end of 2000.
|The Depths |
Enron, Calpine dropping sharply