A BRIEF COMPARISON of Dreams vs Reality
I confess upfront this is not an analysis de rigueur. Nonetheless, it really does not require a doctoral thesis to compare the relative investment merits of 'Dreams' vs 'Reality' at the current market levels of each.
Specifically, I refer to the stock prices of Internet stocks - whose market caps are well beyond the financial ionosphere, whereas blue-chip veteran gold mining stocks are groveling near their lows.
Internet stocks have reached price levels sustained only by the DREAMS of its shareholders and the brokers touting them. At the far end of the spectrum are the largest and most conservative gold mining companies in the world, whose prices have relentlessly dwindled since the beginning of 1996. The latter group reflect the REALITY that 'paper' investments have captured the minds and common-sense of the delirious investing public.
Whereas all 'DREAMS' are eventually lost with time, 'REALITY' has the inimitable characteristic of transforming itself, and reasserting its influence in another direction. DREAMS dissipate while REALITY just changes direction.
The U.S. market has been for the last few years madly bidding up the Internet DREAM stocks, while concurrently it has been selling the REALITY gold mining stocks… both categories to unreasonable and unimaginable extremes. A numerical comparison will highlight the ludicrous extremes reached by each.
Conclusions of the Comparison between DREAMS & REALITY -
- DREAMS has more then four times the market cap of REALITY, but
- REALITY has nine times the Book Value of a DREAMS
- DREAMS has a PER of Infinity… a tad high, whereas
- REALITY has a PER of only 24
- REALITY's EPS is more than 31 times that of DREAMS
- DREAMS market cap is a whopping 23,620 times its Book Value, whereas
- REALITY's market cap is only 639 times its Book Value
(*) Symbol Code
ANGLY - Anglo American Gold - south Africa
ABX - Barrick Gold
PDG - Placer Dome
NEM - Newmont Mining
YHOO - Yahoo
eBay - eBay
AOL - America On-Line
(**) A large loss
Final Observations -
My concluding observation will only address Yahoo (DREAMS) vis-à-vis REALITY.
Here is a stock that has in the last two years risen from about $5 to $220 - an increase of 4,300%, while the DOW climbed a mere 70%. All this IRRATIONAL EXUBERANCE while gold stocks measured by the XAU have relentlessly fallen by 53% in the same period.
In your wildest DREAMS precious few enjoy this type of appreciation in one stock in a whole lifetime. To have invested in it was more luck than financial savvy. To hold it at these levels is to risk losing a good portion of the 4,300% appreciation. But to buy at these multiples borders on delusion and a desire to self-destruct.
Yahoo is no monopoly, like Microsoft has been… at least up until the government's anti-trust suit. Yahoo has NO patent on anything. The easy of entry into their business is within the reach of many computer "geeks." Yahoo has no lock on their business. Its rapidly rising stock price is a crap-shoot not based upon sound investment principles. It is merely the last stages of a "tulip-mania" - which will end up like all those which went before. It is purely a DREAM… which will also fade away.
Now we face REALITY which has been going in one direction for a very long time. All serious market students universally agree about the immutability of cycles. Furthermore, another principle of economic and/or investment cycles which most experts agree upon is the following. The longer it takes for a cycle to reverse itself, the greater will be its amplitude in the opposite direction.
Gold mining stocks have been in a down trend and bottoming out for a painfully long period. In comparison THEY ARE AS OVERLY-SOLD as are the DREAM stocks Grossly Over-Bought. HOWEVER, that is not to say DREAMS will not continue to endure for a while before people "wake up" (who can control the length of a dream, anyway?). Unfortunately, the blow-off period of any DREAM STOCK does not lend itself to analysis - which may also be said for REALITY stocks on the downside. Nevertheless, eventual reversals can - and often are - violent changes in directions.
Common-sense dictates DREAMS will become NIGHTMARES for the imprudent and greedy, while REALITY will enrich the enlightened and conservative.
In summation I would sell 'DREAMS' and buy REALITY.
7 December 1998