Tuesday, December 2, 2008

"Hall"f Baked

I have nothing against Glenn Hall of TheStreet.com personally. I know nothing about him. I'm sure he's a nice guy, but I can't believe some of what he writes. I'm starting to think that TheStreet.com doesn't have an editing staff.

Glenn writes a piece for TheStreet.com that he calls "Today's Outrage." As you can probably surmise, Glenn proceeds in each article to rant, complain, or disgrunt about his topic-du-jour. My turn. I recently read a couple of his pieces that made my jaw hit the floor.

The first one is from today's article entitled "Today's Outrage: Sears Isn't Worth $4 Billion." Glenn writes:
How can Sears be worth $31.84 a share? Target fetches only $29.54, and JC Penney is down to $16.55.

At the other end of the retail spectrum, investors are only paying $6.41 for Macy's, and at the low end, Family Dollar Stores are only trading at $26.

Wal-Mart is one of the few higher-valued competitors, with its shares at $53.

So I have to ask: Who thinks Sears is better than Target or even JC Penney for that matter?

The outrageous spread between Sears' share price and better-positioned retailers may be due for a correction after investors digest today's earnings report from Sears. The company reported a loss of $146 million for its third quarter, which ended Nov. 1, and said sales fell at both its Kmart and Sears chains in the U.S.
This is scary. We're talking Stock Investing 101. Trying to compare the value of different companies by looking at only their stock prices is beyond absurd. Price alone is irrelevant. If you're going to compare equity values of different companies you need to consider how many shares of stock are outstanding. Sears isn't "worth" $31.84 a share. Sears is worth $4 billion (market value). Sears trades at $31.84 a share because Sears has a market value of $4 billion, and the company has 126.4 million shares outstanding.

What would happen if Sears did a 2-for-1 stock split tomorrow? The share count would double to 252.8 million shares, and the price of the stock would decrease by 50% to just under $16. I suppose that this would satisfy Mr. Hall since SHLD would then have a lower stock price than Target, JC Penney, and Family Dollar Stores. Nothing fundamental would change, however. Sears would still have a market value of $4 billion, but for some reason Mr. Hall would be more satisfied with the "spread" between the various share prices. This is the kind of mistake someone completely unfamiliar with stocks might make.

For the record, the following are the market values of the companies mentioned by Glenn:
  • Target: $21.7 billion
  • JC Penney: $3.6 billion
  • Family Dollar Stores: $3.6 billion
  • Macy's: $2.7 billion
  • Wal-Mart: $208 billion
The second piece by Hall that caught my attention is entitled "Today's Outrage: Google-O-Meter Signals Doom." Glenn writes:
The true sign of how bad it's going to get comes from Google, which is throwing its contract workers to the wolves.

The Internet search giant and ultimate barometer of consumer behavior says it will significantly reduce the number of its roughly 10,000 contractors in anticipation of a worsening economy.

No problem here. Clearly, this is yet another anecdotal sign of a weakening global economy. At the same time, good for Google. One of the knocks on the company has been its free-spending ways. If business is slowing, costs need to be cut, and reducing contract workers strikes me as a logical and reasonable place to slice. Glenn continues:

It may be the right thing to do from a fiduciary perspective, but the folks at Google don't seem to realize how damaging it is to the psyche of consumers and investors alike to see the ultimate growth machine scaling back.

He should have quit after "perspective." It's most certainly the right thing to do from a fiduciary perspective. Why in the world should Google be worried about the damage "to the psyche of consumers and investors?" This is investment analysis that only Dr. Phil and Karl Marx could like.

Is Google owned by shareholders, or is it a federal agency? Why is it up to Google to single-handedly repair investor psychology? Maybe Glenn would like Google to ramp up spending and hiring to the point at which net income will be wiped out and the stock completely destroyed (more so than it has already). I wonder what that would do to investor psyche?

I had bought some Google just before their last earnings report and sold it shortly thereafter, so I have no current position in Google. I do, however, applaud the company for getting serious about the cost side of its income statement. This will certainly help them to sustain strong free cash flow generation during the downturn. The day Google or any company starts basing its decisions on "investor and consumer psyche" is the day I short that stock.

Disclosure: The Rubbernecker is long simple math and short Dr. Phil.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.