I love Twitter. One of the coolest things ever created, Twitter is a worldwide digital forum where anyone can express a thought, an opinion or give directions about anything anytime. As a social media website that has gathered a tremendous amount of traction, Twitter provides a means of quick and efficient communication between people who don’t even know each other. Savvy “Twitterers” (Or is it “tweeters”? I am very green.) create social groups with common interests more quickly than ever before. In fact, Twitter played a valuable role in overthrowing the Tunisian, Egyptian and Libyan governments.
The Initial Public Offering (IPO) for Twitter was Thursday, November 7th. The shares, priced at $26, began trading immediately at $46 per share… a return of 77%!
Even though I have both personal and business Twitter accounts, we still won’t be investing in Twitter for our clients’ accounts. Why? Because we have no idea what Twitter is actually worth. At $26 per share, Twitter’s total market capitalization is over $14 billion. At $46, it is over $26 billion! That seems like a steep price to pay for a company whose current earnings don’t exist and whose future earnings are not yet easily quantifiable.
The IPO for Twitter reminds me of technology stocks in 2001. We don’t have any really good metrics for evaluating what each of these stocks should be worth. In very simple terms, the value of any company should be based on how much money the company earns. A company sells products or services which generates cash (revenue). The cost of labor and materials is subtracted from the revenues and what’s left over is “earnings.” It’s quite a bit more complicated than that, but you get the general idea.
With social media companies, revenues generally come from placing advertisements on their web pages. For example, when you access your Facebook page, you see ads on the right side of the page. The more ads they can place on your Facebook page, the more money Facebook earns. The more people who sign up to have a Facebook page, the more money Facebook earns.
Social media companies don’t want to start out as “ad space” companies. It’s difficult to become popular if all you do is sell advertising. What makes them popular is they fill a social need and get as many users as possible WITHOUT advertising. They operate at a loss for many years as they work to accumulate users with virtually no income at all knowing that, if they are successful, a big payday is in the near future.
During the Tech Bubble of 2001, most early-stage technology companies had no earnings and were operating at a loss. But investors assumed that most of those companies would eventually have earnings. It made sense then to own them immediately rather than wait for the payday. The problem was knowing how much to pay for a company with no current earnings? I remember that a common metric was to base your valuation of a company on its revenues, a common multiple being 10X revenues. If a company had $5 per share in revenues, then you should pay $50 per share for the stock. Assuming the company might someday earn $2 per share, you might not be paying too much at $50 per share. Unfortunately, earnings didn’t pan out on most tech stocks and March of 2001 saw a 70%+ decline in many of those stock prices.
At Twitter’s IPO price of $26 per share, investors are paying 14X revenues! And at $45 per share, they are paying 25X revenues. We are not telling you that Twitter is not worth $45 per share. But it is safe to say that Twitter is not cheap at that price.
As much as I love Twitter (you can follow me @boyercorporon), you will not see us owning the stock unless it gets much cheaper.
The website for Obamacare was launched last month and thoroughly embarrassed itself. As if the Affordable Care Act didn’t have enough critics already, the website www.healthcare.gov functioned as if my grandmother had developed it.
I currently have insurance and President Obama promised me I could keep it if I want to. But I heard that people who don’t have insurance and are trying to obtain it through the Affordable Care Act were running into technical difficulties on the website. I figured that by the early part of November, they would certainly have worked out the “glitches.” As one who has to see something to believe it, I created my own account at www.healthcare.gov. I had no intention of actually purchasing insurance. It didn’t take me long to run into this:
I didn’t bother logging in again after 30 minutes nor did I call the Marketplace Call Center.
By now most of you know that contrary to what President Obama promised, many people who had insurance are NOT able to keep it. Apparently the caveat to “you can keep your insurance” is “if it is the type of insurance approved by the Affordable Care Act.” It seems that most insurance policies are NOT approved by the Affordable Care Act.
And by now most of you are aware that the Affordable Care Act is more “affordable” for some (those who didn’t have insurance at all because they couldn’t afford it) and less “affordable” for others (those who had it and now have to pay extra for those who previously did not have it).
This should not be a huge surprise. If you are insuring 30 million people who were not previously insured, it is going to cost more money. If you are insuring people who have pre-existing conditions who were not previously insured, it is going to cost more money.
Health care insurance was very expensive already and it just got more expensive. With the government in charge of paying providers, it will get even more expensive because the government is notorious for getting ripped off. Medicare loses billions to fraud every year because government workers will NEVER be as vigilant as private workers will be. If you are a provider in the private workplace and a consistent victim of fraud, you are soon out of business. But a government doesn’t go out of business. It just raises taxes.
If you thought Obamacare was going to make health care cheaper, think again. The previous health care system had many flaws and needed fixing. A few grenades here. A land mine there. But not the Obamacare nuclear bomb.
I think maybe the website is only a precursor of the benefits yet to come. Of course, if you can keep your existing insurance and continue seeing your current doctor, it should be okay, right?
50 years ago this month, I was in Mrs. Rawlings’s 4th grade class at Nieman Grade School in Shawnee. Early in the afternoon on November 22nd, Mr. Walden, the school principal, announced over the loud speaker that school would be let out early that day. The President of the United States had been assassinated that afternoon.
To a 9-year-old boy, getting out of school early was a treat, regardless of the reason. If someone had to get shot so we could get out of school, so be it. I didn’t know that much about the President and I didn’t know what it was like to get shot, but I knew what it was like to get out of school. I went with what I knew.
Whenever a tragedy like this occurs, there are always some sick people who are actually happy our President is no longer alive. People who should know better. 4th graders don’t know any better, but adults should.
I grew up in Shawnee, Kansas, and as far as I can tell, it is against state law to consider oneself a liberal (although Robert Docking, a Democrat, was governor from 1968-1975). Nevertheless, I can clearly remember my parents’ concern that evening. They were acting different than I had ever seen before. They were glued to the screen of our 24” black and white television as the news reported the events of the day. My mother cried. And I realized later in life, she wasn’t crying so much for the life of John Kennedy. She was crying for the life of the Presidency; the life of our country. My mother knew that in a democracy, you are not always going to like who is in charge. But in a civilized society, you don’t shoot them just because you don’t like them. I hope we remember that but I’m afraid we won’t.
When the scariest headline for the month of October is that the Obamacare website can only handle 10 enrollees per day, the stock market couldn’t see any reason to go anywhere but up. This has to be one of the most boring years ever news-wise.
The economy keeps slowly growing and the most recent jobs number showed a healthy increase in employment in October despite the government “shut-down.” Or should I say BECAUSE of the government “shut-down?” Perhaps the private sector does NOT need government spending in order to grow. Perhaps the private sector grows better when the government is smaller and spends less. Perhaps people will learn from this or perhaps not.
In October the stock market increased 4.59%; 25.29% year-to-date. Foreign markets were also up and interest rates remained steady. With the healthy jobs increase in October, we would not be surprised to see the Fed begin “tapering” their bond buying earlier than consensus expectations, perhaps as early as December.
At Boyer & Corporon Wealth Management, we see no reason to aggressively increase our equity position. Stocks are not cheap. However, they are not so horribly over-valued that we feel the need to become very defensive. We are trying to manage duration in our fixed income portfolios because we are confident the Fed will feel less inclined to maintain its easy money policies. Nevertheless, we are not expecting a sharp rise in interest rates and see no need to have a large allocation to cash.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.