Internet Stocks: The Mania That Wouldn’t Die?
Investment manias, like TV sitcoms, are supposed to follow a formula.
There should be a central idea at the start, then a buildup, then a conflict of some kind, then a resolution.
Historically, the classic resolution of an investment mania has been a bust, with a lot of people losing huge sums of money and vowing never again to go near the thing that cost them so dearly.
That’s the way it happened with gold in the 1980, for example: The belief that inflation would run at double digits forever helped drive gold from $232 an ounce at the start of 1979 to more than $800 by January 1980.
It didn’t last: By late 1981 the price was back to $400. By mid-1982 it was under $320. Only rarely has gold traded above $500 since then. The current price: $299.
Likewise, the mania for tiny oil and gas companies in the late 1970s made near-millionaires out of some of the Denver brokers who were at the center of that penny-stock craze. By the mid-1980s the oil market had gone bust, and the penny-oil-stock market was in ruins, never to rise again.
The great mania of our era, of course, is for technology stocks. And the mania within the mania is the Internet stock craze. But as with so many things about the 1990s bull market, the Internet mania has refused to follow the script. The price patterns traced by many Net stocks this year are mocking much of recorded market history.
Many Net-related stocks soared in 1998, then went into hyperdrive in the first few months of 1999. Then came a crash: Between spring and late summer many Net stocks lost 50% to 80% of their value.
America Online, one of the Internet sector’s best-known stocks, started the year at $37 (adjusted for a recent split). On an end-of-day basis the price peaked at $83.75 in early April. But the buying then seemed to dry up.
In part, the problem for AOL and other Net stocks was rising interest rates. Higher rates often take the steam out of highflying growth stocks as investors reconsider what those assets are worth as the cost of capital increases.
But some Wall Street pros figured that the mania for AOL was just running the typical course. Newer Net stocks--the infrastructure builders, for example--were attracting more interest. There was only so much money around. AOL’s share price relative to earnings was already astronomical. The stock, if not the company, was “yesterday’s model.”
By early August, the selling in AOL had become so intense that the price fell under $42, a drop of 50% from the spring peak.
Wall Street considers a 30% decline in stocks overall to be a very bad bear market. So a 50% decline is a disaster--especially if you bought near the peak.
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If the Internet mania followed the classic pattern, many investors should have sworn off AOL and many of the other badly hammered Net stocks after August. Too much pain, too much distrust, too much “I should have known better.”
Yet by last week AOL was hitting new closing highs, finishing last Tuesday at $85 before easing slightly to $83.38 by Friday.
Internet directory firm Yahoo, whose shares collapsed from a closing high of $219.13 in early April to a low of $121 by early August, were at $231 by last Wednesday.
The recovery in these and other Net stocks has occurred despite a further rise in interest rates and despite heated new competition from another wave of Internet initial public offerings that have vacuumed up huge amounts of investors’ dollars.
It isn’t that manias can’t recur in the same investment. Usually, however, it takes a long time for that to happen--long enough for a new generation of investors to appear, who have no memory of what happened before.
Alternatively, crushed mania stocks can recover their old highs if the underlying companies finally grow into viable businesses that justify the initial hype.
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That has been the case with biotechnology, for example: That stock sector rocketed in 1990 and 1991 as the public’s fascination with biotech’s promise reached its zenith. But then began a long decline for the stocks, lasting through 1994.
Only this year has the American Stock Exchange’s index of 15 biotech stocks surpassed the old peak reached in January 1992, amid rising profitability for the largest biotech firms and a flurry of new product approvals by government regulators (the current foreign flap over U.S. bioengineered foods notwithstanding).
Thus, for AOL and other Net stocks to crash, then recover their old highs, all within eight months is quite extraordinary. Things like this aren’t supposed to happen. But there it is.
Undoubtedly, this won’t change the minds of many Wall Street bears who say there is really nothing different about the current tech stock craze. Maybe it’s more drawn-out and has some unexpected twists, but ultimately the result will be the same, they say: a massive bloodletting, reducing many stocks’ values to less than the cost of a roll of toilet paper.
Yet the Internet is different, in that it isn’t some isolated development that suddenly catches the investing public’s eye. In virtually every corner of the economy, albeit to varying degrees, the Net is changing how business is done, here and abroad.
That fact, by itself, isn’t necessarily a justification for the market values investors are ascribing to many Internet-related companies. There is no doubt that much of what is happening, especially with new Net stocks, is purely legal gambling--a roll of the dice by traders hoping for a short-term payoff.
Likewise, it’s hard to disagree with investors who now look at the Net stocks’ pattern of the last year and say: “I’ll just wait--they’ll be back down again.”
Nonetheless, the public’s understanding of the Net’s long-term growth potential does provide the fundamental explanation why investors can’t leave it alone--or not for very long, anyway.
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Byron Wien, investment strategist at Morgan Stanley Dean Witter in New York, recently wrote up an interesting commentary comparing today’s stock market with the art market.
For centuries, he notes, “People who have become wealthy have wanted to own beautiful things. The purchase of fine art also confers social status on its owners.”
Ownership of technology companies, via their stocks, today confers its own kind of social status. Do people overpay? Quoting an art dealer, Wien noted, “It’s difficult to put a price on what you really like.”
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The Mania That Won’t Die?
After a spectacular run-up in the first few months of 1999, shares of America Online crashed 50% by late summer. Now, the stock is again trading at its spring highs. Biweekly closes and latest, on the New York Stock Exchange:
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Friday: $83.38
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Source: Bloomberg News
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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com
