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Coming the week of November 8th 1999:  An all new stock ideas section featuring long and short ideas.
TULIP STOCKS ARCHIVES--named for their uncanny resemblance to the Dutch Tulip Bulb Mania of the 1600's
Internet Search Engines eBAY Inc Colt Telecom Group PLC Amazon.com Onsale Inc
Bluefly Inc DoubleClick      


COLTY (COLT TELECOM GROUP PLC): Overvalued, over rated, a true tulip stock. Colt is a fast growing provider of telecom services to customers in London and Europe. COLTY has 635 km of fibre optic cable and 1370 customers. By the end of the year COLTY will have operations in London, Frankfurt, Hamburg, Dusseldorf, Amsterdam, Paris, Zurich, Brussels, Madrid, and Milan. The company's fast growth, and recent mergers in the industry combined to light a fire under the stock. The stock has increased tenfold since May 1997, and has more than doubled since late April. We regard the optimism as excessive. The company will not show a profit this year or next year. We expect competition resulting from deregulation to knock down profit margins across the telecom industry. The rise of these shares has been driven by a combination of over eager (and under informed) investors, momentum players, and massive short squeezes. The near vertical rise in these shares recently should be a warning to take profits now. Historically, when a stock chart shows a rise straight up there is usually an equally swift fall. COLTY is displaying additional worrying technical patterns. MACD, Stochastics, and RSI have all shown negative divergences during the recent rise.  Weekly ADX is at a dizzying 62 and daily ADX is turning down from 47.  We look for this stock to find first downside support at 130. We expect to see it trading at a still expensive 85 within the next year. COLTY has surpassed Vodafone as our favorite British short position.


AMZN:(Amazon.com): While we believe AMZN is the premier online bookseller, both in terms of selection and service, we find the stock's stratospheric current price to be unjustified. Internet momentum junkies have pumped this one up to unsustainable valuation levels. AMZN has enjoyed rapid growth and now ranks as the 3rd largest U.S. bookseller but it is expected to be unprofitable both this year and next year. Competition in its home online market is heating up from both Borders and a rejuvenated Barnes & Noble site. We expect margin pressure to hurt results. We also view AMZN's sole focus on online retailing as a negative for future growth--there will always be many people who prefer to shop in a bookstore. With the intensified competition and a lessening of internet fever, we expect this stock to get walloped. The stock has recently entered a downtrend after a failed double top. This looks like a short to us. While we believe AMZN is the premier online bookseller, both in terms of selection and service, we find the stock's stratospheric current price to be unjustified. Internet momentum junkies have pumped this one up to unsustainable valuation levels. AMZN has enjoyed rapid growth and now ranks as the 3rd largest U.S. bookseller but it is expected to be unprofitable both this year and next year. Competition in its home online market is heating up from both Borders and a rejuvenated Barnes & Noble site. We expect margin pressure to hurt results. We also view AMZN's sole focus on online retailing as a negative for future growth--there will always be many people who prefer to shop in a bookstore. With the intensified competition and a lessening of internet fever, we expect this stock to get walloped. The stock has recently entered a downtrend after a failed double top. This looks like a short to us. (5/22/98)

Amazon has  more than tripled in price over the past month. AMZN is now trading at 28 times trailing sales. The company's market cap is now double that of its much larger competitor Barnes and Noble.  We do not believe that the company's prospects warrant a larger market cap than Barnes and Nobel. Loss estimates have widened for this year and next as price cutting and increased advertising expenditures eat into margins. The share price is being driven solely by momentum players and a massive short squeeze. When the internet stock juggernaut ends (and investors return to their senses) this company will be recognized for what it is-- a bookseller, and will be accorded the multiple of a bookseller. We expect the rocket shot up to end soon. Technical cracks have appeared during the past month's rally. A negative divergence has appeared in money flow. RSI, stochastics,  and CCI are all showing divergences with price. ADX at 53 has flattened and turned down. We view a downturn in ADX from the above 40 level as a clear warning signal that a trend is about to change. We would sell now to take part in the swift decline that allows follows financial manias. (7/6/98)

 Amazon wowed a few "analysts" this week when it reported a narrower than expected loss.   We were not among those impressed by the latest earnings report.  The company's loss grew to $-.84 from $-.24 a year ago.  Margins decreased to 21.1% from 22.7% because of increased marketing costs, increased discounting of products, and higher sales from the lower margined music line.  In normal (i.e. non-internet based) financial analysis, a company with increasing losses and decreasing margins is generally not a great investment opportunity.  The company announced that margins would remain under pressure because of increased spending on marketing and an expansion of its distribution facilities.  This expansion of its distribution facilities in order to build inventory moves the company closer to its store based rivals which also must maintain large inventories. It also takes away one of the main differentiating props which have been used to justify its lofty stock price. In short the company is moving closer to resembling a bookseller rather than the technology play it is often mistakenly identified as.  The company's shrinking margins could come under further pressure as competition heats up in the online world.  Onsale and Buy.Com have both announced plans to sell some items at cost.  The company itself is not worried about the decreasing gross margins and says they are likely to fall as Amazon adds new products.  In our view gross margins and profits still do matter, even for an internet company.  In a similar vein, rising competition is not a positive.  Amazon will remain in the red for the next few years.  Current estimates call for a loss of 93 cents a share this year, -$0.22 in 2000, and -$0.07 in 2001.  The rapid revenue growth that is often used to justify the high valuation levels has been accompanied by an even steeper run up in share prices which effectively discounts all revenue growth.  Amazon now trades at a Price/Sales ratio of 29.7 (versus 28 in July).  By contrast its 2 chief rivals, Barnes & Nobel and Borders trade at Price/Sales ratios of 0.90 and 0.61 respectively.   While the shares have dropped 40% from their January highs, they are still up for the year to date and have risen 270% from October's lows.  These shares remain overvalued and extremely vulnerable to a severe downward rerating when the current mania subsides and investors begin to value the company in line with other booksellers.(01/30/99) 



Internet Search Engines: Do you remember biotech in 91/92, Boston Chicken's IPO, Netscape's IPO--we do.  We also know that these over priced, over hyped stocks haven't come anywhere near their highs since then. We submit to you that the search engine companies are birds of the same feather. Sure they have great growth rates, but they have even greater valuations. Do you really want to buy a stock whose PEG ratio is 3 times it's growth rate, or that is trading at 300 times next year's earnings? We know we don't. When the growth rate slows from 100% a year to 40% the stocks will come crashing down. Let us also not forget the whirlwind pace of technological change--today's hot tech idea is often tomorrow's company relegated to the dustbin of history. We're looking to take the entire group of internet search companies out and short them. Extreme overvaluations, vertically ascendant charts, and excessive investor enthusiasm are our favorite shorting friends. (5/19/98)

We also like LYCOS (LCOS) as a short. Lycos in many respects has been left behind in the race to be the premier search engine/internet portal. We see them falling farther and farther behind Yahoo in name recognition and use. Trading at an astronomical 293 times next year's earnings, with a PEG of 6, this stock has entered a downturn which we expect to continue.(5/22/98)

We are adding 3 new names to our short picks in the overvalued internet search/content provider/portal sector.  YAHOO (YHOO) has been enjoying phenomenal growth as it seek to establish itself as the premier internet portal and directory. It has also enjoyed phenomenal growth in valuation. YHOO is currently trading at  38 times book value,55 times sales, 196 times 1998 earnings estimates, and 91 times 1999 estimates. The stock has a PEG ratio of 3, and a PEG based on next year's earnings of 1.6. We look for valuations to come back down to earth soon as internet stock mania withers. Technically YHOO is deteriorating. Money flow has been falling since early May. The 21 day moving average has fallen below the 55 day moving average, and the stock has completed a failed double top. Our first downside target is the 21 week M.A. at 94. We look for the stock to approach its 200 day moving average at 75 by fall.  Our second pick, INFOSEEK (SEEK), enjoyed a 30% runup last week. We like Infoseek's technology, but we feel they will have an uphill battle against larger rivals in the race to become one of the main internet portals. The stock has fallen from its 52 week highs of 45, but is still trading at twice its February levels.  The stock has runup from 4 3/8 over the past year.  We view this stock as being extremely overvalued, trading at 107 times next year's earnings estimates, with a PEG of 2.1.  Technically, SEEK has entered a downtrend. The stock is showing divergences in both money flow and OBV. We look for the stock to hit overhead resistance at 32-33 and from there to begin a final wave 5 downward towards its 200 day moving average at 16 1/2. Our third new pick, C/NET (CNET) surged 11 1/2 points this week after NBC purchased a stake in the company. We view the mark up in the shares as excessive. C/NET's new online service SNAP! entered the portal game late. Even with NBC's backing, SNAP! will face an uphill struggle to gain market share against more established rivals. We regard the deal as too little, too late. We expect the shares to decline as deal related investor enthusiasm subsides. Trading at 17 times sales, and at a prospective 1999 PE ratio of 66, this stock has limited upside potential and  great downside risk. Distribution has been taking place. We look for CNWK to return to its pre-deal level of 31, near its 200 day moving average. (6/12/98) 

INKTOMI (INKT): We are amazed--not by Inktomi's technology, but by the fact that 2 analysts  recommended this overheated stock in an overbought industry this morning. Recommending jumping on top of an expanding bloated bubble has never seemed the best course of action to us. Perhaps someone should remind them that all bubbles eventually pop. We are even more amazed by the investors who sent this stock up 25 1/2 points during the day. But then again, maybe we shouldn't be amazed, investors have yet to learn from the long line of past financial manias. INKT is a promising growth company, but its current valuation bears no resemblance to the actual fundamentals. INKT has developed new search engine technology that speeds the traffic of web based info by created a large database of web addresses so that the information doesn't have to be retrieved from its original location. INKT has signed up AOL, DEC, and Yahoo to license its technology. While the technology is good, it was already priced into the stock when it first started trading at 18 1/2 last month. With a market cap of $1.5 billion, Inktomi  is trading at 115 times trailing sales. We have yet to see a profitable buying opportunity develop when stocks are purchased at 115 times sales. However, we have seen many short sale profits occur at these multiples. Therefore we will short this Tulip before it starts to wilt. (7/6/98) 


eBAY Inc (EBAY):Recent hot IPO eBAY went public at $18 on September 24th and saw its stock open at $53 1/2, giving it a market cap of $2 billion. The stock has cooled off over the past week, and now trades at $40 a share (a figure that some brokerage firm analysts consider a bargain).  EBAY runs person to person online auctions and receives a small placement fee and commissions from sellers and buyers. To the uninitiated, this is similar to the fees newspapers  receive for running   classified ads.  As in the classified ad business, eBAY doesn't have to buy or store the items being sold. Thus it has none of the costs associated with carrying an inventory and is able to achieve very high gross margins. However, there are risks involved.  Just as the potential exists for fraud in the print classified business, it exists in the online person to person auction business. It is estimated that fraud occurs in 1% to 2% of all transactions.  This presents potential legal liabilities for a company like EBAY. The company itself stated that "there can be no assurance ... that  it will successfully avoid civil or criminal liability for unlawful activities carried out by users through the company's service."  EBAY has put some safeguards in place to try to protect against fraud, but some legal experts believe that by attempting to protect users, a company like EBAY is actually implying that it has a responsibility to protect users, thus opening it up to lawsuits when these safeguards fail.  EBAY itself has had a problem collecting from its users. The company's accounts receivables were over 28% of sales in the first half of this year. It believes that $1 million of this amount is uncollectable (approximately 6% of first half sales). Besides the risks from potential  fraud, the company also faces competition from Yahoo and Excite which have both started person to person auctions.  EBAY's IPO success was largely attributable to it being one of the few profitable internet companies, but the company has warned that it may need to incur losses  as it mounts a large advertising and promotion campaign in a bid to maintain a high level of revenue growth.   Current estimates are that EBAY will have revenues of $37 million this year and $76 million next year . Operating profits are estimated to be $4.8 million this year and $6.2 million next year.  Based on these figures the company's current market cap is 21 times next year's estimated sales. To justify these valuation levels, the company would have to be on the verge of becoming the next Home Depot (which we do not see happening). In our view, the person to person auction business, like its print cousin the classified ad, is a niche business that is never going to become a dominant form of exchange of goods. When these shares are available to short, we would be shorters.  Six months from now we look for these shares to be trading below their IPO price of $18. (10/2/98)


Compare the valuation levels of EBay and another well known auction house, paying particular attention to the PEG ratios.(11/25/98)


EBay Sothebys
Years in Business 2 plus 220 plus
Revenues $32m $412m
P/E Ratio 1999 1157.7 23.5
Price/Sales 110.6 3.3
Price/Book 96.7 3.6
Yield 0 1.6%
Market Cap $7.9 billion $958million
PEG next 5 years 23.0 1.6



ONSL:(Onsale Inc): The stock of internet retailer Onsale has risen 800% since October 7th.  Spurred on by the rapid rise in shares of  internet auctioneer eBay, speculators turned their eyes to the perceived "bargains" in the online auction business--i.e. Onsale.  The meteoric rise of ONSL is due entirely to one key word: internet.

In the rush to buy anything with the word internet associated with it, investors have lost sight of one basic fact:  the underlying business.  The primary business of a seller of  widgets is selling widgets, whether the vendor's primary retail location is a store or an internet website.   The underlying nature of the business is not magically transformed by the move to a different store front (in this case a web site).  Onsale's primary business is the selling of excess merchandise:  refurbished and close out products.  The close out retailing segment has never managed to become anything but a niche business, an also ran, in the retail store industry.  The industry's introduction to the internet does nothing to change this fact.  Onsale's product mix includes computers, peripherals, consumer electronics, housewares, sports and fitness equipment, and travel packages.   The company has injected some excitement into the mundane close out segment with its use of interactive auctions.  The auction format allows buyers to interact, and compete with other buyers.  The results of this competition are frequent bidding wars between buyers.  These bidding wars frequently result in prices that are above what could be obtained elsewhere.  We question whether customers will continue to pay more for products once the initial uniqueness of participating in an auction wears off.   But an eventual waning of enthusiasm is the least of the company's worries.

Onsale's latest 10K filing with the S.E.C.  detailed the many risks that the company faces, and the uncertainty that its business model will be successful.  The company is facing increasing competition in the online auction market.  There are now several merchants that compete directly with the company's product lines.  The barriers to entry are low--the software to set up an online auction business is readily available.  The company's 10K says that "increased competition is likely to result in reduced operating margins, loss of market share, and a diminished brand franchise, any of which could materially adversely affect the company's business, results of operation, and financial results."   The greatest competitive threat the company faces is the possibility that computer makers will enter the auction business themselves.  Many of the company's suppliers already sell equipment via their internet sites, and the introduction of close out auctions would increase the suppliers' margins  and at the same time strengthen their relationships with  customers. 

The increasingly competitive nature of the online auction business, coupled with Onsale's rapid expansion, has led to a sharp increase in ONSL's operating expenses and to a decrease in operating margins.  The company expects its sales and marketing spending to increase as it "continues to enhance its brand recognition through marketing alliances. However there can be no assurance that the increase in expenses will result in enhanced brand recognition."   The company states that because of the "evolving and unpredictable nature of its business" it is uncertain whether the ONSALE brand name will be accepted by consumers. 

Other risks cited by the company are its reliance on other internet companies to drive traffic to its site, the inventory and price risks of the company purchasing and warehousing merchandise, the uncertainties of introducing new categories of merchandise, and unreconciled merchandise adjustments.

The risks outweigh the rewards for holders of Onsale stock at current levels.The  run up in price of ONSL has left it severely overvalued.  The shares now trade at over 10 times sales.  The company will report a loss for this year, and current estimates call for the company to report a loss in 1999.  Now is the time to sell, or sell short, shares in this retailer of refurbished and close out merchandise.


BFLY (Bluefly Inc): Bluefly Inc. operates the internet e-commerce website Bluefly.com.   The website was started in September 1998 and sells discounted off-price, end-of-season, and excess inventory men's, women's, and children's apparel and accessories.  In November, the stock surged from $4 a share to a 52-week high of $24 after the company announced marketing deals with portals AOL, @Home, Yahoo, and Lycos which now feature the company in their shopping sections.

  The company formerly operated under the name Pivot Rules, which according to the company's December prospectus, "designed and marketed a full collection of golf sportswear for men under the Pivot Rules brand name. In June 1998, the company decided to discontinue the operations of its golf sportswear division and devote all of the company's resources to build Bluefly.com."  The company intends to become the leading online off-price apparel retailer.

Bluefly.com had gross revenues of $300,000 in its first 3 months of operation (a period that included the important Christmas shopping season).  The website attracted 664,000 unique visitors in December and had 26,000 registered users (It should be noted that registration is required to use the company's MyCatalog personalized search feature, and thus not all registered users are necessarily actual buyers).  The portal deals and increased marketing spending will boost revenues and name recognition in coming quarters.  While the company's business plan and initial results show promise, there are several hurdles which it must overcome before its current valuation levels can be justified.

Like many other internet startups,  BFLY's current valuations discount future growth and do not take into account the inevitable risk inherent in any startup business.  A non internet based company must show results and staying power before it is accorded a higher stock price.  In the current environment, an internet based company need not show results--only a vision for the future.  The reality is that the chances of a startup retail  business succeeding are not increased merely because the company eschews the traditional milieu of the land based store for the newer internet based model.

Because we are not immune to the cynicism which is endemic among denizens of our town, there are several risks, uncertainties, and statements detailed in the company's filings and prospectus that give us cause for concern.   Chief among them perhaps, is management's discussion of its discontinued Pivot Rules division, "The golf sportswear division had been operating at a loss, and despite efforts to promote the brand, orders for the sportswear collection had been significantly below the Company's business plan and even further below last year's level."  This does not give us a lot of confidence that the transition from startup to established off-price retailer will be a smooth one for Bluefly.com.  An apparel retailer, whether store based or internet based, is subject to the cyclicality and sudden changes in trend that are a way of life in the clothing business.  While the golf division had been profitable in several prior years, it was not immune to the fickle nature of the fashion industry.  There have been very few apparel based retailers   that have not at some point been caught on the wrong side of a trend.   Merchandise markdowns to sell excess inventory, and their accompanying lower margins, are the end results when a company temporarily misses the fashion parade.

The volatile nature of the apparel business is not the only risk the company faces.  While the company considers itself to be  the pioneer in bringing the off-price apparel concept to the internet, it now has competitors.   Designers Direct and America Off Price both run off-price e-commerce sites that feature designer clothing at 25-75% off retail prices.  The company must also compete for customers with TV's QVC , catalog merchants, and traditional off-price clothing stores. Bluefly "expects its competition to intensify and believes the list of competitors will grow."  The company is starting with a new brand, and must compete for customers and merchandise with better financed giants like TJ Maxx and Marshall's which are able to buy in larger volume (and get better terms).  If the internet based off-price business shows signs of being viable, we expect the giant chains to swiftly move in.   There is also no certainty that internet based end-of-season apparel retailing will take off.  While the internet offers 24 hour shopping and ease of use, there will always be many consumers who prefer to have a changing room available to try on their clothing before buying it. 

Lack of profits  are another cause for concern.  The profit potential of  online off-priced retailing is still unknown.   The company expects to incur losses for the "foreseeable future" as it increases its marketing  expenses .  Spending on advertising and the necessary infrastructure to become an industry leader will require additional financing. Margins will likely come under pressure as competition mounts.  The company must also continually stay abreast of the latest technology, and incur the necessary expenses to acquire it. 

Vision and a good business plan are not enough to justify the current stock price.  The Bluefly.com website has only 4 months of results under its belt.  Four months is not enough to establish the staying power of a business, nor is it enough to base future profit projections on.  With the threat of competition, only 4 months under its belt, an unproven online off-price apparel market, and the uncertain nature of fashion trends (and the risks associated with them), these shares do not deserve a premium rating.  It must be remembered that the company is an apparel retailer and thus competes with other apparel retailers.  Apparel retailers traditionally do not command the excess valuations that internet mania has driven these shares to.  While another bout of "buy anything with a .com" could temporarily drive these shares higher, at this point in Bluefly's development the shares would be fairly valued at $4-$5 a share. (01/31/99)


DCLK (DoubleClick Inc): The shares of Internet ad management company soared from an October lows of 13.5 to a recent high of 200.  The announcement of a 2 for 1 stock split on March 11th provided the initial impetus for a 75% rise in the shares over the past 2 weeks.  The recent price appreciation has lifted the market cap of DoubleClick, a company with $80.2 in annual revenues, to $3.58 billion.  The shares now trade on a price/share ratio of 36.57.   It is not the nosebleed valuation levels attached to these shares which have turned us negative on the stock however, rather it is several uncertainties related to the company's business.

DoubleClick's primary operating divisions include: the DoubleClick Network ( a C.P.M. based advertising network), DoubleClick Direct (a pay-per-click ad network), and its DART service which provides advertisers with a technology that allows them to measure in real time the effectiveness of their ads and to dynamically deliver their ads to targeted audiences.   Although the company's DART technology has received accolades from the press and has been the subject of many a glowing analyst report over the past 6 months, the technology is an insignificant part of the company's total revenues.  Substantially all of the company's revenues to date have come from the cost-per-thousand (C.P.M.) based DoubleClick Network.  This troubles us because C.P.M. rates have been in a steady decline across the industry over the past year. When a company's principal revenue producing product is experiencing downward pricing pressure, we usually take that as a warning sign to exit the stock.

The reliance on C.P.M. based ads for its revenues is also troubling because the effectiveness of banner advertising has been declining over the past year.   Click-through rates in the industry, which once averaged 2-2.5% , have declined to 0.5-1.0% in the past few months.  We question how long advertisers will be willing to put up with diminishing rates of return on their banner ad dollars before either exerting some serious downward pricing pressure on the prices of banner-based ad contracts, or abandoning the banner method of delivering ads in favor of an alternate means of advertising their products.

The unproven acceptance and effectiveness of web advertising continue to be troubling, but other problems exist as well.  One problem (the existence of which many of the visitors to our web site will be delighted to hear about) is filtering software which allows an end user to limit or block the delivery of advertisements to their web browser.  Competition for ad dollars is also a concern.   The company must compete with AOL, Yahoo, traditional ad agencies and others for advertiser's Internet ad dollars. 

Perhaps more troubling than competition, or falling C.P.M. rates in the industry, is DoubleClick's heavy reliance on just 4 Web Site clients for 60% of its revenues.  Advertising revenues from search engine Alta Vista alone account for 47% of the DCLK's revenue (the company recently renewed its contract with AltaVista).  DoubleClick  continues to rely on the growth of ad dollars from its contract with Alta Vista for its own growth.  A slowdown in Alta Vista's growth, or a decline in the number of visitors using Alta Vista, would lead to fewer ad dollars coming to DoubleClick and have a serious negative impact upon the company.

We regard these shares as a short based on fundamental concerns and valuation levels (not to mention the annual losses forecast for 1999 and 2000), but we would use extreme caution with these shares.  The company is splitting its shares 2 for 1 after the close on  April 2nd, and split-chasing traders will temporarily cause an upward blip in the shares. (03/28/99)




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Last modified: April 16, 2001

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