'Would you buy Facebook?'... Deja vu: Boo.com... A better, safer place for your money... Real contrarians like natural gas... NY HRA staffing up... Debt ceiling up, dry powder down...
"Would you buy Facebook in the IPO?"
"Yeah, I'd buy it and hold it for three to five years. Social media is huge!"
On the train from New York this morning, I (Sean Goldsmith) overheard a couple of Wall Street's typical empty suits having what I'm sure they considered an intelligent conversation on the markets... Not all Wall Streeters are this vapid… far from it. But these guys were the kind of self-impressed, know-nothings that are all too common on the Street.
Digest readers know we don't like most initial public offerings (IPOs)... especially ones that have been hyped as much as Facebook's. The social networking giant filed for a $5 billion IPO today. It didn't list an offering price, but estimates say the company could be valued between $75 billion and $100 billion. At that valuation, founder Mark Zuckerberg would pocket around $28 billion.
According to the filing, Facebook generated $3.71 billion in revenue in 2011, up 88% year over year. And net income was $1 billion, up 65% from the year before. Would you join the frenzy to buy a company at nearly 30 times revenue and 100 times earnings?
Facebook is a great business. It's got 47% operating margins and 18% net margins. It's got a fortress balance sheet with no debt and almost $4 billion in cash and securities. And it's got more than 870 million regular users who, I suspect, buy something once in a while based on ads they see there.
Facebook could be the next Google, whose market cap has nearly sextupled since its 2004 debut. But the odds are against it. Last year, several social media companies started trading. Those include online gaming company Zynga, business networking website LinkedIn, and daily-deal website Groupon. Those companies, with the exception of Zynga, soared the first day of trading (meaning you would have had to buy at the higher prices... few retail investors are actually filled at the low prices). Peak-to-trough, those companies all stumbled... Zynga fell 20%, LinkedIn was down 46%, and Groupon fell 42%.
But they're not down today. They're up, up, up... Zynga – which gets more than 90% of its revenues through the online social games it sells through Facebook – is up 16% this morning and trading for more than 160 times earnings. Other social networking sites are also popping today. LinkedIn is up 7% and trading for 1,000 times earnings. Groupon is up 10%. Groupon has no net profit (hence, no earnings multiple), but it trades at more than 10 times sales.
If this isn't a bubble, there's no such thing. And you know what happens to bubbles... Remember all those dot-com stocks from the late '90s… like Boo.com? The online fashion store spent $188 million in six months and went bankrupt in 2000, along with many other Internet miracles. Didn't we learn anything from that?
If we learned anything, we've forgotten it. That's humanity for you. Individually, many people can be quite intelligent… But put them in a crowd and their wits vanish... The thundering herd never learns.
There are certainly safer places to put your money than the social networking bubble...
Facebook is a good business. Maybe someday, perhaps in 10-12 years, it'll become a value stock, so the financially literate will find it attractive... like Microsoft. During the tech bubble, Microsoft traded for close to 70 times earnings. The market cap exceeded $600 billion. Regardless of how great the business was (and still is)… the price was silly.
But unlike Boo.com, Groupon, and LinkedIn, Microsoft is a wonderful, cash-gushing business. It's got $51 billion in cash and securities, more than four times its $11.9 billion debt burden. It generated almost $27 billion in free cash flow over the last four quarters. Sales and earnings per share have grown double digits for the last decade, despite constant naysaying about missing out on key technology trends like mobile computing, social networking, and web browsing/search engines. Windows 7 was the biggest, fastest-selling operating system in history… but got far less press than Facebook is getting now. Microsoft initiated a cash dividend in 2003, and it is up eightfold since, rising 25% last year.
And yet, Mr. Market just doesn't believe the colossal value of Microsoft. The share price is up, but the stock still trades around eight times free cash flow… In Extreme Value, I (Dan Ferris), have a whole list of businesses as good as Microsoft. I call them the World Dominators. I started writing about them in Extreme Value about six years ago. They're cheap and safe, and often provide dividends that rise incessantly for decades on end. And they're a much better place for you money than social networking bubble stocks. But if you want to be a real contrarian, there's only one place to go right now...
Mr. Market hates natural gas stocks like he hates few other stocks right now. Falling prices are a good thing. They make life better. They are the essence of wealth creation. Most folks don't tell you this about natural resources investing, but over time, commodity prices tend to fall in real terms. There are no permanent shortages, and we're not running out of anything. The rule throughout recorded history has been toward ever-greater abundance... toward lower prices, not higher ones. Wealth creation might be defined simply as making stuff cheaper.
That's what the shale gas revolution is doing. And few people in this business have written more about the shale gas revolution and its role in what I call the "American Industrial Renaissance" than my research partner, Mike Barrett, and I have. Two months ago, we found a natural gas company I'm convinced will help investors create a fortune… akin to the Rockefeller and Carnegie fortunes. Both had fortunes estimated in the hundreds of billions of dollars, measured by today's money.
And they did it the same way this natural gas company is doing it. Rockefeller and Carnegie got rich by making basic materials cheaper and more abundant. Rockefeller ramped up production and dropped the cost of oil and kerosene, widely used for household lighting at the time. Carnegie did the same in the steel business. They made the price of the stuff they were making fall... and it made them the richest men in history. Is anyone paying attention to this example?
Think about it... Do you really think high commodity prices are good for anybody? It's not even that great for the commodity producers because they tend to make huge capital allocation mistakes when the money comes pouring in. Inflation is always a risk, but the ingenuity of man has always tended to outrun it. If that weren't true, we wouldn't enjoy such a high standard of living today.
The Human Resources Administration (HRA) of New York City added more than 100 workers last July. And it plans to hire another 100 people to serve the growing number of New Yorkers applying for food stamps and rent assistance. According to city records, nearly 1.8 million New Yorkers are currently on food stamps – a 65% increase from four years ago. And those 1.8 million are crowding HRA offices. Despite recently seeing $200 million in state funding cut from its budget, the HRA is hiring. But it's not enough... Or so says the advocacy group Federation of Protestant Welfare Agencies. The group is complaining because long lines are keeping applicants from receiving welfare.
Next thing you know, welfare recipients won't be able to spend "their" money at strip clubs... Oh wait, that was actually up for discussion in Congress. On Wednesday, the House voted 395-27 to pass a bill requiring states to block welfare debit cards from being used at casinos, strip clubs, and liquor stores. The measure was approved by the House last December, but dropped from the final law. It was reintroduced, sponsored by Louisiana Republican Rep. Charles Boustany, as a stand-alone vote.
Any sane person would see the issue with allowing welfare recipients to withdraw taxpayer money from strip club and casino ATMs. Alas, many in Congress do not – despite the fact that California welfare recipients withdrew $1.8 billion from casino ATMs in 2010 (according to the Los Angeles Times).
The opponents' defense... "In many neighborhoods, the closest ATM is located in a nearby liquor store," Democratic Rep. Gwen Moore said when the bill was debated last December. Moore said the bill would "humiliate and marginalize" poor people.
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New 52-week highs (as of 2/1/12): Invesco High Yield Investment Fund (MSY), Nuveen Premier Municipal Opportunity (NIF), PowerShares Buyback Achievers (PKW), Pretium Resources (PVG.TO), Monsanto (MON), Enterprise Products (EPD), Wal-Mart (WMT), and Microsoft (MSFT).
In today's mailbag… SpongeBob silver? No, really… Send your comments to feedback@stansberryresearch.com.
"I think it is telling that your best advisor had 'only' one big win in the top ten list. It's kaizen all the way. Doc is eating the elephant one bite at a time and winning big. Keep up the great work!" – Paid-up subscriber Dr. J
"I've been a happy subscriber to various Stansberry letters for several years now and most recently have been taking Doc's guidance from [Retirement Trader] to populate my portfolio with world dominator stocks by selling puts on them. I've also applied his put selling guidance to recommendations made in other Stansberry letters and in this up market, results have been exceptional…$17.5K in profits on $42.6K at risk.
"My guess is the plan for DailyWealth Trader is to initiate short-term trades off your best ideas and if that's the case, then you can use my track record in Jan as a successful test to the model. Thanks fellas. Now, who needs or wants a nice set of 4 SpongeBob Silver coins (square no less) minted by the NZ Mint w/the queen of England on the flip side, encased in a smart looking wood treasure chest?
"My intent is not to promote the yellow square one's consumer products, but to emphasize to you the impact your writings have had on me. As a director of business development at Nickelodeon, our team was tasked with 'breaking the financial category.' Ideas floated around our team like putting Dora or SpongeBob on credit cards – just what America needs, right? Kids with credit cards! Or using iCarly to shill for Bank of America. I don't think Miranda Cosgrove wants to work for the gov't... My thought (ok your thought) was to put some precious metals away for posterity – start 'em young and maybe we end up with a new generation of savers! Thanks again for your sage advice." – Paid-up subscriber Phil Wertz
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
February 2, 2012