If we had a Twitter account, we could actually fit our entire investment strategy into just one Tweet! Of course, these days, many investors might lose interest by word 10, as attention spans have shortened dramatically given the exponential growth of financial information available via mouse-click. Alas, the byproduct of so much readily available content is that stories must often make outlandish claims to rise above the din. Few seem interested in learning about disciplined investment approaches that have served their long-term followers well, but should a piece offer a Dow 36,000 or Dow 3,600 headline, or perhaps mention a well-known celebrity, folks may take notice.
For example, it was probably not a surprise that the largest initial audience for one of these blog posts was when I discussed the apparent discovery of the equity market by actress Mila Kunis back on March 21, 2013. So when my editors at Forbes understandably decided to insert "Bullish on Stocks" into my original title, "Kudos To Kunis: Mila Knows Of What She Speaks," shortly after the post went live, it became obvious that the fast and furious clicks had come from the masses who had not realized the missive pertained to investing.
Such is the world in which we live, as I learned this weekend that some 10 times as many people recently clicked on stories pertaining to Miley Cyrus and her twerking than on articles about Syria and potential U.S. military action therein. And it would seem not to be the media's fault; supposedly there were 2.4 times as many stories on Syria as there were on Miley.
Alas, it looks like TV host Ellen DeGeneres had it right when she lamented, "Our attention span is shot. We've all got Attention Deficit Disorder or ADD or OCD or one of these disorders with three letters because we don't have the time or patience to pronounce the entire disorder."
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As value investors, we have plenty of patience, secure in our belief that the tortoise will win the long-term performance war, even if the hare wins a battle here and there. And speaking of the rabbits, investors in the social media space have enjoyed sensational returns this year with excitement about the upcoming IPO of Twitter undoubtedly contributing to the euphoria.
Of course, it should be pointed out that companies seldom choose to go public at a discount. Whether it is simply looking to raise capital to facilitate growth or to provide a vehicle for founders to cash in, seldom does a company seek an inexpensive valuation in the IPO process. Twitter, which thus far has revealed absolutely nothing about its finances, will most assuredly prove to be no exception.
While we suspect that the excitement over Twitter will send investors into a frenzy, it should be pointed out that the superstar of social media actually has been LinkedIn (LNKD), shares of which have more than doubled this year alone, shooting the company's market capitalization into the stratosphere to nearly $30 billion.
By way of comparison, investors now think that LinkedIn is more valuable than insurance provider Allstate (ALL), railroad operator Norfolk Southern (NSC), agricultural products company Archer Daniels Midland (ADM) and healthcare provider Aetna (AET), all of which have market-caps less that of LinkedIn. More importantly, we find each of those four to be sufficiently undervalued to warrant residency in our broadly diversified portfolios.
Certainly, LinkedIn has been growing like wildfire, but the Internet space is littered with numerous riches to rags stories and the valuation for LNKD is expensive, to say the least. After all, the shares now change hands at nearly 180 times adjusted earnings and more than 20 times revenue.
While growth stock investors are not much concerned with where a company has been, as they care far more about the future growth potential, there is no guarantee that anything near expectations will materialize. True, LinkedIn is likely to show handsome top- and bottom-line growth for the foreseeable future, but even if the company doubled the $1.40 per share in adjusted profit earned over the last 12 months every year for the next three years (i.e. 100% compounded growth), earnings per share would reach 'only' $11.20. At the current near-$250 price, the stock would be trading for some 22 times that pie-in-the-sky earnings tally. Providing some valuable perspective, analysts (historically an optimistic lot) now believe that earnings per share may hit $5.00 in 2016.
While we respect that LinkedIn is a Wall Street darling, we need to look no further than Apple (AAPL) to find an equally sexy stock that actual trades for an inexpensive valuation. In addition to just having supplanted Coca-Cola as the world's most valuable brand, according to a report released this week by Interbrand, a brand consulting company owned by the Omnicom Group, Apple trades for a very attractive multiple of around 12 times trailing-twelve-month earnings. In addition, the consumer electronics powerhouse pays a substantial and sustainable dividend that provides a yield of 2.3% while the company has an approved share repurchase program of $60 billion (which equates to more than 13% of the outstanding shares).
And @Carl_C_Icahn seems to agree with us, per his Tweet and interview with CNBC on October 1. Via Twitter, Mr. Icahn said: "Had a cordial dinner with Tim last night. We pushed hard for a 150 billion buyback. We decided to continue dialogue in about three weeks." On CNBC, he stated: "It's a no-brainer and it makes no sense for this company with their multiple being so low not to do a major major buyback."
LinkedIn certainly has plenty of potential to beat expectations, but we would rather invest in undervalued companies with proven businesses. And we will have no interest in the Twitter IPO, as the history books confirm that value-oriented strategies have outperformed their growth counterparts by a significant margin over the long-term. To us, that's #SmartInvesting.
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Opinions expressed are those of John Buckingham, chief investment officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc., and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.
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