|Bidding Up eBay |
eBay is now in 21% of all large-cap funds
Squali, who says he has fairly aggressive earnings and revenue growth projections for eBay, puts the stock's 12-month price target at $68 -- below yesterday's close of $70.75. "They would have to beat growth targets by a fairly wide margin to justify its current price." While valuation remains the big cloud on the otherwise sunny horizon for eBay, some critical analysts have pointed out a few potential challenges that "should keep eBay up at night," borrowing from the title of a Forrester Research report from last month. Among other things, Forrester voiced concern about how eBay's enterprise-seller program -- in which IBM and other big companies unload excess goods -- would affect its legions of small sellers, who might theoretically migrate to another auction site. eBay watchers disagree on the likelihood of such a migration, but other concerns loom as well. " AOL Time Warner and Amazon.com are moving into eBay's turf," Squali says. "I don't want to say it's all downhill from here, but it's going to be increasingly difficult for eBay to maintain their market share." While most eBay watchers have confidence that CEO Meg Whitman will continue to navigate the ever-changing Internet landscape successfully, many say the stock is due for a pullback. "It's hard for me to envision the stock going up very much from here," says Morningstar's Kathman.
Chasing PerformanceEnter mutual funds. Fund ownership in eBay has steadily climbed since the company went public in 1998, in the face of considerable volatility, as the auction site emerged as the most profitable Internet company. The company, with its remarkable business model and clean balance sheet, became the de facto "safe Internet play." As the bubble burst in mid-2000 and the markets slumped in 2001 and 2002, more and more funds took shelter in eBay. In the past three quarters, the number of large-cap blend funds reporting a stake in eBay nearly quadrupled from 37 to 147.
|Premium Blend |
eBay also is in 26% of all large-cap blend funds
While the increased fund ownership can signal broad confidence in a company's ability to execute, huge changes often signal two unpalatable fund-industry moves: performance-chasing and "window dressing."
"Funds clearly engage in momentum investing, which leads a stock to become richly valued," says David K. Musto, an assistant professor at University of Pennsylvania's Wharton School. Window dressing -- when fund skippers buy and sell securities ahead of public disclosure dates, to show winners in the portfolio and hide the loser bets -- "does happen, but it's more difficult to see. They're trying to do it behind the scenes." However, it has negative implications for fund and stock owners, says Mercer Bullard, fundholder-rights activist and founder of Fund Democracy. "It happened in 1999 with Qualcomm," when the stock soared 2,619%. The stock surged higher in the final months of the year as skippers jockeyed to get in on the year's hottest stock, only to shed 60% of its value during the next six months. "Window-dressing gives the appearance that the fund was investing in a company that was doing well," Bullard says. "A stock that is the subject of window-dressing will have a significant drop, but no one knows exactly when it is." Because most mutual funds disclose their holdings either twice-yearly or quarterly, it's difficult to tell if funds have continued to rush into eBay since the third quarter's end. However, so far in the fourth quarter, eBay's shares have climbed 34%.