“Every age has its peculiar folly; some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the mere force of imitation.” So wrote Charles Mackay in his classic Extraordinary Popular Delusions and the Madness of Crowds in 1841, but the observation sounds as apt now as it was then.
The tumult surrounding the wild swings in stocks such as
(ticker: GME) no doubt has been fueled by the desire for both gain and excitement for thousands of traders taking their cues from Reddit. And while it shares many aspects of past bubbles, notably the funneling of abundant liquidity into speculative vessels, this new wave of online traders has its own, unique aspects of instant sharing of information and opinion through commission-free apps and message boards.
As discussed here last week, the GameStop saga has turned into a social and political story, moving from the financial media to mainstream network television news and the front pages of general circulation newspapers. And the big gains being scored have become a cause célèbre on social media.
To their elders, the sudden surge in stocks that had been held in low esteem by market professionals recalled episodes in financial history, most notably the infamous Dutch tulip bulb bubble in the 1600s.
Martin Fridson, the longtime dean of the high-yield bond market and a financial historian, noted that initially only rare tulip bulbs were viewed as extremely valuable for the flowers they produced, and were highly sought-after by the Dutch upper crust. Only later, when the public started speculating in ordinary bulbs, did the bubble bloom. Tulip traders would have informal markets in taverns, he said in an interview, “similar to Reddit forums.”
More recent history of financial excesses was recorded in the pages of Barron’s over its past century. Looking back only five decades, longtime editor Alan Abelson took note in this space at the peak of the Nifty 50 phenomenon, a collection of so-called One-Decision Stocks, which were meant to be bought and held forever because of their supposed strong, long-term growth prospects.
Back in May 1972, when the market was trading at a price/earnings multiple of some 15 times next year’s expected earnings, he observed: “Compare that with multiples on a random (well, almost, anyway) sampling of growth issues.
for example, is selling for around 42 times earnings; Burroughs, 42; Avon, 60; Xerox, 53; Kresge, 40; Coca-Cola, 42; Polaroid, 90.”
Many of those names have passed into stock-market history, while the shell of the once-great
(KODK) was bid up last year and in the current craziness.
(XRX) is still around but trades for a fraction of the triple digits it commanded then. As for
(KO), its share price has grown 140-fold, adjusted for splits, but not counting its attractive dividend.
As the dot-com craze was cresting, Barron’s took a look at
(CSCO), calling it the “most successful company in the hottest sector of the internet economy.” But selling at 130 times the heady expectations for that fiscal year, there was a question about the stock’s valuation, which gave it the second largest-market cap at the time after
(GE), a separate story of sic transit gloria.
The dot-com era will be recalled as a time when the public became passionately involved in the market, arguing about stocks on message boards on Yahoo! and AOL, while being emboldened to trade for themselves with new, relatively inexpensive online brokers.
That’s nothing compared with what’s happening with WallStreetBets, with its—shall we say—acerbic vernacular, coupled with free trading on the Robinhood app and on other online brokers. On the other side are some hedge funds, notably Melvin Capital, which had sold short shares of GameStop. Among outright sellers of the electronics retailer’s shares were also corporate insiders, who sold in the $30 range approximately one-tenth of GameStop’s Friday price, about double where it ended 2020.
Ironically, Elon Musk has turned out to be one of the most listened-to voices by the Reddit rebels even as the ascent of his
shares ((TSLA)) has made him the world’s richest man. If anything, the success of the electric-vehicle chief in the face of criticism from the “suits”—as the old fogies who use traditional financial analysis are called—has given credibility to speculators bidding up heavily shorted stocks.
Yet for all the brilliance of its business, Tesla’s valuation recalls that of Cisco of 2000. High-yield credit specialist KDP calculates the company’s enterprise value (equity plus net debt) at 127.8 times Ebitda (earnings before interest, taxes, depreciation, and amortization, a measure of cash flow) in the fourth quarter of 2020. Based on KDP’s optimistic growth outlook, Tesla’s EV/Ebitda ratio will decline to a mere 77.4 times in 2021, 64.6 times in 2022, and 54 times in 2023.
Anthony irony is that many of Reddit raiders’ targets are anything but cutting-edge technology, but companies whose best days might be long past. Prominent among them is
(KOSS), once the leading maker of headphones but long since supplanted by the likes of
(AAPL) AirPods and its Beats models, and Bose’s noise-cancelling cans. Koss Portapro retains a nostalgic following for a model introduced as a replacement for what came with your Sony Walkman. Yet the stock has run up 30-fold since the turn of the year while bleeding red ink in the trailing 12 months, according to Yahoo Finance.
The history of bubbles is that they do not deflate gradually. Inflated prices will attract sellers of shares, either long-only holders or the companies themselves. Bloomberg reports that the Ontario Teachers Pension Plan, the largest holder of
(MAC), sold its stake worth about $500 million after shares in the beleaguered mall owner nearly doubled after year-end in tandem with GameStop.
Companies caught up in the wave, including
AMC Entertainment Holdings
Naked Brand Group
(NAKD), could take advantage by issuing shares, our colleague Alexandra Scaggs reports on Barrons.com. Others such as
American Airlines Group
((AAL)) could sell new stock, while still others could swap net equity for their distressed debt, she also writes. But keeping other zombie companies alive ultimately destroys the capital pumped into them.
Write to Randall W. Forsyth at [email protected]