A Palm Reading on Value of ‘New Economy’ vs. ‘Old Economy’

Palm Inc. (PALM)

(Jim: Don’t buy)

(Mike: Don’t buy)

Jim: I’ll warn you, Mike, that I’ve come to today’s chat loaded for bear. And a good part of it doesn’t have much to do with Palm, which makes those hand-held electronic organizers that are all the rage.

Mike: Uh-oh. Is that why we’re reviewing just one stock today?

Jim: You got it. Palm is emblematic of what a lot of pundits are calling the “new-economy” stocks that supposedly are all that investors should buy these days--you know, while they turn their backs on those ugly, decrepit “old-economy” stocks.

Mike: Right, Palm’s initial stock offering early this month--its parent 3Com spun a small chunk of it off to the public--had a tremendous amount of hype, and now Palm is worth $31 billion. That’s more than 3Com, even though 3Com still owns more than 90% of Palm in addition to its other businesses. I suspect that’s why, when you say “emblematic,” I hear a sneer in your voice.

Jim: You heard right. By what logic is 10% of a company worth more than 90%? I won’t beat about the bush: I think this new economy vs. old economy debate in the stock market is baloney and doing a great disservice to the average investor by throwing them a major head fake. So, can I borrow your soapbox?

Mike: Yes, but then I’m going to want it back. But first, let me ask you something: Do you have a Palm organizer?

Jim: No, even though I guess my brain is more organized than not. Look at all the years I’ve endured verbal abuse from our colleagues here because I have one of the neater desks in the newsroom.

Mike: Now don’t hide your light under a bushel! Yours is the cleanest desk. You are the most organized person I’ve ever met in my life. In fact, sometimes I think of you as my Palm.

Jim: Watch it, my friend.

Mike: When I’m looking for a document that’s on my desk--somewhere beneath six layers of accumulated paperwork--I often find it easier to just ask if you’ve got it. Then you typically pull out a desk drawer and there it is!

Jim: Gee, thanks, I’m so flattered. All I need now is an LCD screen on my forehead. So you don’t own a Palm?

Mike: No.

Jim: Why not?

Mike: Because if I did, I’d lose it. My bosses here once gave me a pager, and half the time the only way I could find it on my desk was to dial its number and listen for the beep.

Jim: Anyway, there’s no getting around that the Palm is a very cool gadget.

Mike: It’s the first device that actually got traction, or critical mass, in an industry that had tried for years to get off the ground.

Jim: You mean electronic organizers.

Mike: Yes. When the Palm first emerged as the Palm Pilot a few years ago, it really took off because it was useful, convenient and it had handwriting-recognition software that worked. That’s a technology many companies tried to perfect, notably Apple Computer with its Newton. But that product was so bad it turned into an extended joke in the Doonesbury comic strip.

Jim: And, of course, Palm and its rivals today have turbocharged their organizers so they do much more than store addresses and calendar dates.

Mike: Right, they connect to the Internet, run games and so forth. And the future beckons even more. Some new products can download movie clips, though I don’t know what for. If it’s for people who like to watch movies on their Palms while they’re crossing busy intersections, that’ll be rather a self-limiting market, no?

Jim: And get this, Mike--unlike so many of those “dot-com” companies, Palm actually is turning a profit.

Mike: I’m sorry, a what?

Jim: A profit.

Mike: Can’t be.

Jim: I’m serious. In the six months ended Nov. 30, Palm earned $23 million on sales of $435 million, and its sales are surging. That’s another reason why Palm went public on March 2 at $38 a share, and the stock promptly skyrocketed as high as $165 that day. And then . . .

Mike: Then the stock nose-dived, and lots of people took a bath. The stock is now in the mid-$50s. So once again, we’ve seen the greater fool theory of investing.

Jim: The greater fools being the ones who bought at $120 or $150 a share.

Mike: Actually, anything more than $55 at this point.

Jim: And that’s a lesson in itself. I like Palm, and the stock could very well go back up. But there’s another lesson here: If anyone thinks Palm is a guaranteed winner just because it’s part of the new economy, and that Johnson & Johnson or Coca-Cola or any of the other old-economy stocks are has-beens, I’ve got a bridge to sell them.

Mike: You know, we are a species--we Americans--who love to put things in easy-to-comprehend categories. Then we saddle each category with a stereotype so we don’t have to think about individuals. You know . . . men and women, blacks and whites, the rich and poor, Texans and non-Texans . . .

Jim: And I hate to say it, but among the worst offenders are the media.

Mike: Wall Street does it, too. If you’re an analyst looking at a stock, you have two choices: You can crunch the numbers and interview the chief executive and visit the plants, or you can just pigeonhole the stock and say, here’s what I think about that pigeon.

Jim: Let me cut to the chase. Clearly the Nasdaq composite index and other technology-laden indices have buried the Dow Jones industrial average and other less-technology-laden averages in recent months. That’s a fact.

Mike: But look at what’s happening now.

Jim: Exactly. Now those old-economy stocks that everyone thought were dead meat are making money for their shareholders hand over fist. The Dow Jones industrial average is again soaring--last week it had its biggest point gain in history, nearly 500 points in a day--and the tech-heavy indexes have mostly suffered lately.

Mike: Merck is way up, DuPont is up, even ailing Eastman Kodak is rebounding.

Jim: That’s not all. You know what stocks are now in the old Dow? Oh, Microsoft, Hewlett-Packard, Home Depot. Now I want someone to look Bill Gates straight in the eye and tell him he’s running an old-economy company.

Mike: I see things a slightly different way. Let’s assume for a moment that you’re looking at some of these old-economy stocks, say Gillette or Coke. And, by the way, I own some Coke shares. The fact is, those stocks are on sale right now, and great buys.

Jim: Of course they are. Now don’t get me wrong. I’m not saying those stocks will keep going straight up. And I’m not saying to stop buying solid tech companies, either, like Cisco Systems or Sun Microsystems. They’ll keep growing, too. But c’mon! Enough of this new-economy/old-economy garbage. We’re merely looking at these groups going through different cycles, which stocks do all the time.

Mike: You’re getting to a fundamental point about how to invest. Fads come and go. The danger in pigeonholing stocks like this and then forgetting about them is that you forget that everything comes back around.

Jim: Don’t listen to all the noise. Buy value.

Mike: Right. It’s just when things look bleakest that these stocks deserve a hard look.

Jim: So let’s finish with Palm. It’s a hot product, the company’s sales are growing rapidly and it’s profitable.

Mike: It’s got impeccable new-economy credentials.

Jim: Would you buy the stock, especially since it’s dropped so much from its IPO rally?

Mike: No, I wouldn’t.

Jim: Me neither.

Mike: It still hasn’t dropped down to anywhere near a rational price yet, and it faces some big problems.

Jim: Starting with?

Mike: Competition. There’s only about 47 competitors trying to sell Palm-like devices. Now it’s true that Palm has the majority of the market and the best-known brand name. But there are some tough rivals out there, Hewlett-Packard to name one, that are going to make Palm’s life more difficult.

Jim: And what happens when you have 47 competitors?

Mike: Price wars break out, and down go everyone’s profit margins.

Jim: Exactly. Plus, there’s talk that one day you’ll be able to get Palm-like data on your wireless phone, and I subscribe to that thinking. That’s just one more problem on the horizon for Palm.

Mike: Yes, but I’d hasten to add that there’s only so much stuff you can place on that little screen of a wireless phone. But maybe someday we’ll get to the point where the displays are imprinted on our eyeballs.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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