boards today. Since it expounds on my previous HCBK posts on "New Economy" vs. "Old Economy", I thought I would post it here. Plus, some HCBK holders are surely 'Net/Tech investors or considering wading in:
THE TRUTH ABOUT NET AND TECH STOCKS
First, let me state that in the interest of full disclouser I am long this stock at a higher level. Not much higher, but I am underwater. I thought I bought in at a good level, but I forgot to take into account what I am about to write.
In years past, a stock was IPO'd at $10. It had earnings and cash flow. On the open, it might pop 20-50%, depending on how hot it was. A year later it might be at $20. 2 or 3 years later, it might be at $30 or even $50. A triple or quintuple counts as a grand slam in investing circles.
Most of the stock was freely traded for these "old IPOs." Insiders could dump pretty much whatever they wanted, subject to Rule 144 regs. Because the float was larger in the first place (supported by earnings and cash flow), the stock was NOT affected by and insider selling. Supply and demand were already in balance, a balance determined by the earnings and cash flow.
With 'Net/Tech stocks, a new paradigm came into being. Stock was restricted on the IPO to a fraction of previous IPOs. Floats of 5-15% of total shares was not uncommon. With supply severly restricted, IPO's flew -- up 3-fold, 5 fold, 10 fold -- from pre-IPO talk. Stocks were up 10 or 20 fold from the IPO price or what was the pre-IPO price (if the underwriteres were smart enought to raise the price at the last minute and get the company more cash).
Fast forward a few months or a year. Lockup restrictions expire; supply comes out in large quantities relative to the float. There are no earnings or cash flow to support the stock; forget stock buybacks. Everything fundamentally remains the same, but the stocks continue to sink. A stock that traded at $125 or $150 or even $200 now sells for $50, give or take a few bucks.
What happened? NOTHING!! All we did was roundtrip to where we would have been if the company had gone public later (with earnings and cash flow) and been able to sustain a larger number of freely trading shares.
I would like to think that a stock down 75% would not attract insider selling, but I fear differently. If you owned the shares with a cost basis of $0.50 or $2.00, does it really matter if you get $50 or $150 for your shares?
Remember, had this been a traditional IPO, the insiders would have been THRILLED with an price of $30-$50 a few years down the line. At these levels, they're ahead of the game: the stocks are still up more than they could have expected and in a shorter time frame.
There are exceptions -- CDNOW, KOOP, etc. -- where the stocks are down closer to 90%, but most are still comfortably in the "profit zone" for insiders, VC's, etc.
What to do? Well, I'm not on margin and though down substantially, I don't need the money. So I will wait, hope for a substantial rally or an announcement by insiders of a 6-month or 12-month moratorium on selling, and hope the stock moves up.
It's frustrating: the stock can be drastically oversold, good quarterly results can be announced, and yet we can still sink and sink and sink. The opposite of what happened the first 3 months: no operating results to speak of, losses upon losses, and the stocks flew to the moon.
I hope I'm wrong on this analysis -- I would stand to gain -- but I fear not.
What to do? Make sure you don't tie up money you need, don't use margin, and don't overextend in any 1 sector or stock. That makes the pain more tolerable.
"First, let me state that in the interest of full disclouser I am long this stock at a higher level. Not much higher, but I am underwater. I thought I bought in at a good level, but I forgot to take into account what..."
When I first read this I thought you were back in HCBK...but I guess you were referring to some tech stock you bought at a higher price...
Hey, CK, I have some old tulip bulbs that I might be willing to sell....
Seriously though, couldn't agree with you more about some of the net and tech stocks. Fortunately, I bought AMAT, ATML, EMC, ASND(LU), LSI, and CUBE years ago when they were selling much, much lower. Still holding. (And I can now say that I, for one, am no longer "poor, hungry and stupid"). Only SGI has been a big disappointment. But what the h*ll, you can't win 'em all.
BTW, when HCBK hits 30 it's dinner and drinks on me for Kootz, PHS, JJR(wherever you are), and CK.
That dinner and drinks I mentioned in the previous post...well, after today the dinner will have to be the "grand slam special" at Dennys and the drinks will be cokes.
Poorhungryandstupid is going to have a hell of a lot of compatriots after today. But have no fear (if you weren't on margin) all the tech "major companies" will be back - but, it will probably take 6 months to a year now.