Diplomats, journalists and protesters from around the globe converged on Chicago this week. The “City of Big Shoulders” pulled off one on the international stage by hosting the NATO Summit. Meetings and marches went forward, and just about everyone came out safe, without major incident. Hats off to my home town.
On another note, General Motors pulled its ads from Facebook just days before the technology company floated its shares on the NASDAQ. The automaker—that old, blue-collar industrial company—cited a lack of results from the eight-year-old tech upstart’s ad platform. That’s music to the ears of a direct mail printer competing for ad dollars.
The subsequent “big thud” was heard around the world on Friday, as Facebook share prices couldn’t gather momentum, and receded back to their start point by end of trading.
On Monday, Facebook’s precipitous fall sent people into a frenzy trying to explain why the IPO had fizzled and underwhelmed the marketplace so evidently. It would have been worse had underwriters and institutions not quickly jumped in to prop up the price at the $38 offering point, and the outlook may very well degrade when the stock settles and is open to short positions.
I don’t normally take pleasure in this type of thing, and I certainly applaud innovation and entrepreneurship. I use Facebook personally and for work, and I do think its worth much more than “watching your high school friends get fat,” as one late-night comedian commented.
What bothers me is the sky-high valuation. I’m no Luddite, and I AM a huge believer in IP and intangible value. In other words, I don’t need to touch everything I buy. But $100 billion to be told how many of my “friends” “like” Amazon? The market will weigh in on this, and it will be instructive to watch.
Growth stocks have typically underperformed value stocks, as formalized by the scholars Fama and French in 1992 with their “Three-Factor Theory” (PDF
). These kinds of stocks are described as “growth” because believers in efficient markets want the equity marketplace to sound more rational.
Subscribers to behavioral finance would call these “glamour” stocks. As with a lot of things that are sexy, they typically disappoint.
In comparison, value stocks are thought by believers in efficient markets to yield better results because of higher firm- or sector-specific risk factors. While they’re perceived as more susceptible to economic downturns, they offer opportunity based on substance (actual cash flows) rather than the more speculative opportunity presented by their shinier, sexier counterparts in the “glamour” sector.
Fama and French give me comfort. I’ve always eschewed flair and glamour in favor of substance and rigor. It’s good to be a value stock in a value industry.
Prices of print stocks are depressed, but that might be a big opportunity, especially given the dividend streams some of them offer. And remember that in the long run, as Fama and French asserted, value will out deliver glamour. Of course they used the term, “growth.”
I’d hit the “like” button on value any day.