IN PRINT ARCHIVE CIR Spring 2000
|Catch the Wave|
|by Barb Clapham|
Every day it's something new. Who could have predicted that fishermen would be selling their catch over the Internet instead of at the traditional dockside auction? From the advent of the Internet, to Christmas shopping on-line, to e-fishermen, a tidal wave of technological change shows no signs of slowing.
From an investment standpoint, we must question whether the landscape has changed as well. Should we continue to use tried and true methods of analysis, or change the way we value securities of these new companies?
On one hand there are those who think that many technology stocks have tremendous potential and so deserve their sky-high valuations. On the other hand are investors who believe the prices of these stocks reflect pure speculation. This group, which encompasses traditional value investors, thinks the prices of these equities are due to fall--plummet, in fact.
It is an understatement to say it hasn't been easy being a value investor over the last several years. Even though many value investors believe they will ultimately be proven right when the speculative bubble bursts, they still have to admit they have missed out on tremendous gains. Sticking to your value investing guns has been hard on returns, patience, and in some cases ego. One money manager recently acknowledged that as he watches the high flyers continue to rise, "it's like a personal affront."
Some have changed their minds and started to invest in new economy companies. A daily financial newspaper recently sported the headline,"Suddenly, Wall Street believes in Amazon.com." The article describes how investment advisors are now overlooking the company's huge losses and singing the praises of Amazon's potential.
Brian Schofield has realized the potential of Amazon.com for some time. Schofield is a fund manager for the YMG Sustainable Development Mutual Fund and YMG Sustainable Value Pension Fund. He points out in his article on page 16 that investing is still, as ever, based on corporate performance; more specifically, on future income streams. However, he believes we need to use new analytical tools to define value, particularly the value of new economy companies such as Amazon.com, Yahoo! Inc., or Nortel Networks. Economic Value Added (EVA*) is a useful tool for this purpose. This measure can assist in evaluating both old and new economy companies, and can be used by both growth and value-style investors. EVA may be especially helpful for the latter group, not only to determine value but to explain to plan sponsors why they hold certain highly valued technology stocks in their portfolio, or not.
It is harder to determine value and pick stocks these days. Figuring out which companies will prosper in the new economy and which will fall by the wayside is a complex job. However, new tools are at hand which can help. Investors need to keep an open mind and utilize all available methods to advance this task.
*EVA is a registered trademark of Stern, Stewart & Co.