Blue Chips or Potato Chips?

Often, when we invest in equities, people told to invest in Blue Chips for the sake of stability. The Blue Chips normally stand for the companies who are the market leader in their industry. For example, General Motor (GM) in car industry, Dell in computer, Microsoft in software industry, Wal-Mart in retailing and so forth. Are the Blue Chips really a good investment? Why not we examine some to get some ideas?

Google, the world top leading search engine as per 23rd March 2006 has market capitalization of $101.04 billion ($341.89/share). Its Price Earnings (PE) stands at 68.09 with Earnings Per Share (EPS) at $5.02. No dividend paid out so far.

What does it mean? With PE of 68.09, it means when you invest in Google at the current price, you need to wait for 68.09 years to get back all the dollars you invested. The inflationary factor not calculated on this matter. Say, you invest a share of Google with $341.89 in 2006, you need to wait until 2074 to get back $341.89. Please note the value of $341.89 in 2074 is TOTALLY DIFFERENCE with the value in 2006. Of course your invest return period could be shorten if there are some positive progress. For example, for the coming years, Google earns spectacular earnings years after years which mean its EPS more than $5.02. It might be $10, $30, $75 or even $300! Who knows? One things for sure is high growth normally will not long last. It could grew at the rate of 20%, 40%, 80% or even 200% per year. But, to continue such high growth rate for 10 years, 20 years or 50 years, there is only one route: OUT OF THE PLANET EARTH.

Baidu, Chinese top search engine saw its price drop since its 1st day closing price at $122.54. As per 23rd March 2006, its price stands at $50.60. Is it a bargain since its price drops more than half of its peak? To answer the question, let’s look at its fundamentals. Its PE is 273.51 with EPS $0.19. No Dividend paid out before. Even tough its price drops more than half from its peak, its PE seems at the sky rocket end with only tiny earnings. Is it a good investment choice? Ask to the RIGHT candidate – RATIONALITY.

VA Linux, once a darling star of the dot com mania who is tagged as “Next Microsoft” peaked at $320. The price quoted in 23rd March 2006? $3.65. The lost of almost 99% of its value. Enhancing shareholders value? Yes, it is but with reverse direction. At 3.65, its PE stands at 32.88 and EPS of $0.11. No dividend ever paid out.

Wal-Mart Stores listed in New York Stock Exchange (NYSE) since 1970 is the world top retailer. It outpaces its rival such as French Carrefour, UK based Tesco and German Metro. Its price on 23rd March 2006 was $48.54. Its PE stands at 18.10 and EPS at $2.68. Its dividend paid out translates to 1.40% yield.

How about a legendary “Oracle of Omaha”, Warren Buffett’s holding company, Berkshire Hathaway Inc.? Its price as in 23rd March 2006 was $90,000. Yes, $90,000 per share! Its fundamental? PE at 16.25 and EPS of $5,538.47! There is no dividend paid out since its listing. (Note: the price quoted here is Class A share. There are 2 classes of Berkshire’s share: Class A and Class B where the price of latter is 1/30 of the former.)
Though the examples, I believe RATIONAL investment judgment could be made. After all, what we need for our investment portfolio is the REAL blue chips which are always there but not the potato chips which its destiny to be eaten up.

Technorati Tags: Investment, Blue Chips, Wal-Mart, VA Linux, Baidu, Google, NASDAQ, Microsoft, New York Stock Exchange, NYSE, PE, EPS, Oracle Of Omaha, Warren Buffett, Berkshire Hathaway Inc., Potato Chips,

IPO Stars

Google's share pirce quoted in NASDAQ since listed.


VA Linux price quoted in NASDAQ since listed.


Baidu price quoted since listed in NASDAQ.

Technorati Tags: Investment, Initial Public Offering, IPO, VA Linux, Baidu, Google, NASDAQ, Microsoft, China

IPO, Initial Public Offering or??

IPO which was a sure gain scheme during a boom time in 90s became an urban legend that you will definitely rewarded with handsome gain if you apply it. The legend happened most of the times during 90s. There were people lining outside the brokerage houses overnight in order to get the IPO form. Some even pay out some money in order to get an application form.

Euphoria against IPO made investors act without rationality. Take an example, VA Linux. When it was 1st day trading of the shares (9th December 1999) in NASDAQ, there was no trading that morning until the price soared $290 against its IPO price of $30. The stock peaked at $320 and closed at $239.25, a gain of 697.5% in a single day! What is its underlying value? It valued at a total of $12.7 billion ($12,700,000,000) when it reached its peak price on day one. The company history? Less than five years old, it registered a cumulative total of $44 million in revenue with loss of $25 million! If you are an investor looking for private company, will you invest in the company with lousy performance like this? Definitively not!! But, it happened in equity market!! What’s its price on 21st March 2006? $3.71.

While billion of dollars lost by the average Joe who handled their hard earned money to invest in “Next Microsoft”, who gain from this frenzy mania? The money invested would not evaporate in the air unless there are Martians who take it out, so who is the beneficiary of this IPO euphoria? The answer is very clear here.

Will same history repeat? I don’t know. Maybe it is worth while to look at the examples shown below:

Baidu (A 5 ½ year-old dot com company, the largest search engine in China) IPO which set on 5th August 2005 with the price of $27 per American depository share (ADS) saw its first closing price at $122.54. This translated to more than quadruples in its IPO price. On 21st March 2006 closing price was $49.40 compared to its highest price since IPO which was $153.98

Google (A 6 year-old dot com company) which was listed in NASDAQ (19th August 2004) with its IPO price of $85. On Tuesday, 21st March 2006 quote, its price was $339.92 compared to its all time high of $475.11. The pricing method of Google is a bit different. While most companies IPO price is set by their underwriters, Google used a Dutch auction to price the IPO. Such an auction lets potential buyers say what they're willing to pay and sets the price at the point where there are enough buyers to buy all the shares being offered. That's designed to make sure that sellers aren't settling for a way-below-market price and IPO buyers aren't getting a windfall.

Please bear in mind, investors are always look for the long term value appreciation, a short term price performance not necessary determined his investment judgment. It should be distinguished from the speculators. After all, speculators are looking for quick profit. To gain quick profit, there is no underlying business sense that determines its price movement. After all, as long as there are follies willing to pick up the stock at its sky rocket price, you are still gain. By investment judgment solely based on this merit doomed to be failed because you never know whether you are the last folly.
Should we change IPO from Initial Public Offering to Insiders Profit Only? Imaginative Profit Only? Or…..???

Technorati Tags: Investment, Initial Public Offering, IPO, VA Linux, Baidu, Google, NASDAQ, Microsoft, China