The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [193]
But there was a catch: Just as 3Com wasn’t really worth minus $22 billion, Palm wasn’t really worth over 1,350 times earnings. By the end of 2002, both stocks were hurting in the high-tech recession, but it was Palm’s shareholders who really got smacked—because they abandoned all common sense when they bought in the first place:
FIGURE 18-3
Palm’s Down
Source: www.morningstar.com
Pair 5: CMGI and CGI
The year 2000 started off with a bang for CMGI, Inc., as the stock hit $163.22 on January 3—a gain of 1,126% over its price just one year before. The company, an “Internet incubator,” financed and acquired start-up firms in a variety of online businesses—among them such early stars as theglobe.com and Lycos.10
In fiscal year 1998, as its stock rose from 98 cents to $8.52, CMGI spent $53.8 million acquiring whole or partial stakes in Internet companies. In fiscal year 1999, as its stock shot from $8.52 to $46.09, CMGI shelled out $104.7 million. And in the last five months of 1999, as its shares zoomed up to $138.44, CMGI spent $4.1 billion on acquisitions. Virtually all the “money” was CMGI’s own privately-minted currency: its common stock, now valued at a total of more than $40 billion.
It was a kind of magical money merry-go-round. The higher CMGI’s own stock went, the more it could afford to buy. The more CMGI could afford to buy, the higher its stock went. First stocks would go up on the rumor that CMGI might buy them; then, once CMGI acquired them, its own stock would go up because it owned them. No one cared that CMGI had lost $127 million on its operations in the latest fiscal year.
Down in Webster, Massachusetts, less than 70 miles southwest of CMGI’s headquarters in Andover, sits the main office of Commerce Group, Inc. CGI was everything CMGI was not: Offering automobile insurance, mainly to drivers in Massachusetts, it was a cold stock in an old industry. Its shares lost 23% in 1999—although its net income, at $89 million, ended up falling only 7% below 1998’s level. CGI even paid a dividend of more than 4% (CMGI paid none). With a total market value of $870 million, CGI stock was trading at less than 10 times what the company would earn for 1999.
And then, quite suddenly, everything went into reverse. CMGI’s magical money merry-go-round screeched to a halt: Its dot-com stocks stopped rising in price, then went straight down. No longer able to sell them for a profit, CMGI had to take their loss in value as a hit to its earnings. The company lost $1.4 billion in 2000, $5.5 billion in 2001, and nearly $500 million more in 2002. Its stock went from $163.22 at the beginning of 2000 to 98 cents by year-end 2002—a loss of 99.4%. Boring old CGI, however, kept cranking out steady earnings, and its stock rose 8.5% in 2000, 43.6% in 2001, and 2.7% in 2002—a 60% cumulative gain.
Pair 6: Ball and Stryker
Between July 9 and July 23, 2002, Ball Corp.’s stock dropped from $43.69 to $33.48—a loss of 24% that left the company with a stock-market value of $1.9 billion. Over the same two weeks, Stryker Corp.’s shares fell from $49.55 to $45.60, an 8% drop that left Strkyer valued at a total of $9 billion.
What had made these two companies worth so much less in so short a time? Stryker, which manufactures orthopedic implants and surgical equipment, issued only one press release during those two weeks. On July 16, Stryker announced that its sales grew 15% to $734 million in the second quarter, while earnings jumped 31% to $86 million. The stock rose 7% the next day, then rolled right back downhill.
Ball, the original maker of the famous “Ball Jars” used for canning fruits and vegetables, now makes metal and plastic packaging for industrial customers. Ball issued no press releases at all during those two weeks. On July 25, however, Ball reported that