Fool's Eye View

[ March 16, 2000 ]

The E-Contrarian

By Maynard Paton (TMFMayn)

Carburton Street, London -- To a certain extent, the really successful long-term investors, and I stress the words really successful long-term here, have always been found away from "the crowd". All the big winners of the stock markets of yesteryear, the likes of Warren Buffett and Sir John Templeton, have always appeared to be swimming against the tide when making their stock market purchases. Why? Because areas in which investors are not looking are areas where investment value usually lies.

If investors are piling into specific sectors or companies, then it's unlikely they're going to get "good value" from the investment. The very fact that everybody knows about the prospects for a company, and is buying the shares hand over fist, means that a real bargain is unlikely to be had. The investment may go higher in the short term, but that subsequent rise is more likely to be fuelled by others joining the momentum party, rather than a re-evaluation of the company's future.

Sir James Goldsmith, another who scavenged for value, once said "If you see a bandwagon, you're too late." Sir Jimmy died a rich man. Ironically, I seem to remember that his asset-stripping value purchases created a bit of an investment bandwagon all of its own.

By and large, it's stock market sentiment that creates some of the best investment opportunities. Short-term fear and greed creates great buying and selling investment opportunities. You only have to look at the recent fallout in the biotech sector to give a good example.

Bill Clinton and Tony Blair suggest raw data from the Human Genome Project should be made free to all and sundry. Fear then grips the sector, a sector that has rapidly risen on the back of the expected discoveries in human DNA. A biotech sell-off ensues. A day later, everyone realises that what Clinton and Blair actually said was old news anyway. So investors pile back into the sector. Irrationality at its best.

Anyone with a thorough understanding of the biotech sector, and quick enough to get through to their broker, could have nipped in and bought a few of their DNA favourites on the cheap. But usually, the general sentiment towards a company or sector lasts for much longer than a day.

The beauty of the Foolish discussion boards is that anyone can arrive at a snapshot judgment on the sentiment towards any company. And the busiest Foolish discussion board this week has been that of lastminute.com (LSE: LMC). Quite conveniently, this board is awash with strong feeling. And really interesting, it's strong feeling in just one way. Nobody likes lastminute.

You can't miss all the derogatory posts about the e-commerce upstart. "It's overhyped... It's overvalued... There's no barriers to entry... It's a poor business model... They're a glorified travel agent that sells chocolates... lastminute.con". And so it goes on. You get a similar feeling reading what the broadsheets have to say. Media pundits suggest lastminute is the quintessential Internet bubble stock and sure-fire indicator of an imminent stock market crash. Even computer entrepreneur Sir Alan Sugar has commented on the "smoke and mirrors" outlook for lastminute's future profits.

And then there is the backlash against the Foolish Rule Shaker's decision to purchase lastminute for the portfolio. "Gambling Traitors!" they cry from the Rule Shaker discussion board, adding "Where are your Foolish principles? Lastminute are toast!".

So, the general outlook for lastminute, to say the least, is bleak. Very bleak. Everyone expects the company to become insolvent any time soon.

I think both TMFFoolUK and TMFAlan, in their selection of lastminute for the Rule Shaker portfolio, have been quite contrarian. Going against the crowd in their long-term approach to holding lastminute is admirable. Certainly, to outperform the market, thinking differently to the masses and taking a different approach, is the way to go.

But there is just one problem -- David and Alan's timing is off. A long way off. Unfortunately, I think the Rule Shaker has joined the lastminute party far too soon and paid far too much. You see, at the moment, a large proportion of lastminute shareholders care not for the company, its business model nor its future. The stags, when applying for their shares, were optimistic about the short-term share price performance of lastminute. This overwhelming good feeling inevitably brought a very high price for the shares. You don't need any complicated valuation calculations to back that theory.

The stags, waiting for their certificates, now hang on for a quick buck. And just one buck is probably all they'll get. Disgruntled with their measly 35 shares, and with the current lastminute share price just hovering over the issue price, the short-term outlook for a big stag payday is limited. This further disappointment all adds to the severe investor pessimism surrounding the company. How quickly optimism can become swamped by gloom.

Over the next couple of weeks, it should be interesting to follow the performance of the lastminute share price. With all the disheartened private shareholders and a rather suspicious and unconvinced investment community casting doubt over the company, lastminute could be in for a stock market baptism of fire. And just to stoke the flames under lastminute, today's burning of high-flying technology stocks could just be part of a larger, ongoing process.

Although I'm not one who has ever punted on a profitless, jam tomorrow company, and anyone who is a regular reader of the Qualiport will know my cautious approach to valuations, I suspect there could be merit for a Foolish contrarian investment on lastminute in the months to come. Purely on the basis of going against the crowd. And could lastminute really be the UK equivalent of Amazon.com (Nasdaq: AMZN) or Yahoo! (Nasdaq; YHOO)? It's a tempting thought for those who follow an Internet investment strategy.

If you're a believer in the brand, the business model and Martha and Brent, then the general pervasive negativity towards the company could lead to an intriguing investment opportunity after the last stag has thrown in the towel. Sir John Templeton once said: "Invest at the point of maximum pessimism". Although I suspect Sir John wouldn't approve of an investment in an Internet startup, the point of maximum pessimism for lastminute, judging by the Foolish discussion board, could be soon at hand. Are there any e-contrarians out there? Let me know on the Fool's Eye View discussion board.

Related Links

• Foolish Lastminute.com Discussion Board
• Fool Buys Lastminute.com