Story stocks tell tall tales; Better yarns than at any time since the dotcom bubble

February 26, 2014 Leave a comment

February 18, 2014 7:52 pm

Story stocks tell tall tales

By James Mackintosh

Better yarns than at any time since the dotcom bubble

Wall Street broking is based on the idea of telling stories to sell stocks. Depending how you measure it, the Street is spinning better yarns than at any time since the dotcom bubble.

There are 33 stocks in the S&P 500 with valuations which rely on belief in a financial fairy: they trade at more than both 10 times book value and sales and 20 times forward earnings. These are the “story stocks”, companies expected to grow whatever happens to the economic cycle. At the peak of the dotcom bubble there were only 25 such stocks, as few dotcoms met S&P’s conditions.

Broaden to the top 1,000, and things look a little less frothy: there are 84 stocks at more than 10 times book. That is the most since the dotcom bust, but at the peak in 2000 there were more than 200 stocks this expensive – a level which relies in most cases on a story of technological change.

Still, the willingness to buy into stories to such an extent is unusual, whether about social media (Twitter),biotech (Gilead), internet retailing (Amazon), low-cost computing (ARM Holdings) or payment systems (Visa).

This may reflect the frantic desire to find growth in a post-crisis environment where economies have stumbled. Story stocks able to grow, no matter what, look tempting.

The problem is not with the stories. The future of retailing is clearly online. Biotech has fast-track regulation and better results. Even social media seems, in some cases, to be coming up with something which resembles a business model. The problem is with the valuations, which leave no room for error.

Individually, each stock is exposed to plot twists, as LinkedIn (down a quarter since September) shows. Overall, story stocks face a threat from a strong economy, which would make growth easier to find at a lower price elsewhere. Even so, there will be plenty more if a true bubble develops; after identical returns to the past four years, the biotech sector more than doubled in the four months to March 2000. Maybe a happy ending awaits, for some.

 

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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