This is our best shot

When we turned the lights off on Friday, stocks were hitting new highs, led by an upturn in techs.

We gave you our buy side recommendation on Friday – buy Russian energy stocks, particularly Gazprom. Who knows, but it looked like a US Mothers’ Day present to us. By contrast, the whole tech sector appears to be a kiss of doom, the kind of smooch that will make your face itch.

Last time we looked at Amazon – ‘the river of no returns’ stock – it was trading at a price/earnings (p/e) ratio of 550. Compare that to Gazprom, with its 2.5 p/e ratio. Put one beside the other. Amazon is almost all ‘p’. Gazprom is almost all ‘e’. All things considered, we’d rather have the ‘e’.

But Amazon is not the only one. Our younger friends tell us that Facebook has revolutionised the way they get information. They no longer go to newspapers or news sites; they get their news, opinions, and misinformation from Facebook.

Maybe so, but it looks more like a big time-waster to us. And it’s trading at 100 times earnings. Profits would have to go up 1,000% before the p/e ratio came down to a reasonable level. Or, the price would have to fall by 90%. One of those two things will happen. Sooner or later. Our guess is that shareholders won’t like it when it does.

And how about LinkedIn? We used the service, briefly. It was supposed to be handy for making business connections. Did we give up too quickly? Maybe. But at 749 times earnings, it would have to get us a date with the Pope, or an audience with Beyoncé in order to justify the price.

At least Amazon, Facebook and LinkedIn have some earnings… however small. Many of these high-flying tech companies enjoy the incredible lightness of having no federal income tax to pay… Yelp, for example, is worth more than $4bn. It earns nothing… zero… zilch… nada. It’s priced at about 18 times sales and more than 1,000 times Ebitda. Zillow is 16 times sales.

If the prices of these tech companies weren’t enough to scare you away, consider the control issue. Last week, the media reported that Twitter’s stock price has been cut in half this year because of ‘insider selling’.

Wait a minute. How come the insiders were selling? Didn’t they have faith in the company? And how did they get so many shares in the first place?

Oh, dear reader. You can be so naive sometimes.


Bill Bonner on markets, economics & the madness of crowds

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Both government and Wall Street are run for the benefit of insiders. You should know that by now. Of course, what enterprise isn’t?

Here, we’ll offer a confession: we’ve been offering financial advice, recommendations, insights and information for 35 years. Many times people ask us: “if you really knew what was going to happen, you wouldn’t sell it, would you?”

Of course not. We’re not that smart. Or that dumb. And we’re no angels, either.

We research, we think, we study, we take our best shot. Sometimes right. Often wrong. Always in doubt. That’s our business model. Customers pay us to try to figure out how things work and what’s ahead. We wake up in the middle of the night sweating over Triffin’s Paradox or the Bank of Japan’s monetary policy.

But if we really knew what was going to happen, we wouldn’t sell our advice for 99 lousy dollars or give it away for free! We’d keep it to ourselves, go mum and place our bets quietly. Please keep this in mind as you read our advice, below.

And when Wall Street offers to sell you a share in Twitter or Zynga or Zillow, do you think it is for your benefit? Do you think they are giving you an opportunity to get in on a great investment? Nah… not if they can avoid it!

You’re the retail buyer. They will only sell you the shares they don’t want themselves. They’re no angels either. And neither are the insiders who take these tech companies public. They typically keep large stockholdings for themselves, which they intend to unload as soon as they are able. Most likely, after the initial enthusiasm, and with some very public exceptions, there will always be more sellers than buyers.

And if that weren’t enough, the insiders also make sure that they retain control of the money, no matter how many moms and pops own the shares. Facebook insiders, for example, own Class B shares giving them ten votes for every ballot cast by mom or pop.

They will make sure they direct the company’s resources to themselves, one way or another. Typically, the shareholders get no dividends and will never get any substantial piece of the profits.

You think it’s a level playing field, smoothed and policed by the Securities and Exchange Commission? You think Wall Street is there to help you finance your retirement? You think that by buying a stock, you are a real investor, participating equally and fairly in the ‘great capitalist adventure’?

Well, think again! Here’s a trade that will work (cross our heart, hope to die… well, just cross our heart). Sell those damned expensive US high-tech stocks. Buy those cheap energy companies run by corrupt Russian oligarchs.

And if it doesn’t work out? Here’s a true confession of a newsletter guy: it is our best shot. What more can we tell you? Give it a couple of years. If it doesn’t work, let’s both forget it. We won’t say anything if you won’t.

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One Response

  1. 13/05/2014, Ralph wrote

    Another great article from BB – informative, witty and refreshingly different from the normal boring hum drum written by most financial ‘journos’. There is of course one huge benefit in talking up your favourite stocks (especially those that you own) and that is it creates more interest and logically therefore greater demand. One of the great mysteries of the investment management industry to me, has always been the extent to which fund managers generally hate sharing their portfolios. I have always thought that once you have secured the position in a stock that you are happy with, then surely you want everyone to want to buy it don’t you?

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