"Quick catalysts" or "organic growth" in the stock market
Commentary by a columnist at Barron's, the weekly financial newspaper, is worth noting. It is by Michael Santoli and on page 8 of the 6/11/07 issue.
In the easy-money, deal-a-minute ethos of the present (stock) market, outsized attention is being paid to quick catalysts that create an instant one-time step increase in values--LBO's, leveraged recapitalizations, corporate split-ups, huge stock buybacks.
Ignored, by contrast, are genuine organic-growth stories, companies that seem able to keep increasing earnings even as the profit cycle matures and slows.
Apple (AAPL) and Google (GOOG) are the two biggest exception to this rule. All the growth seekers are crowded into these two cult names and a few others.
The "quick catalysts" that he refers to:
"LBO's" (leverage buyouts): When private investment groups buy out previously publicly-traded companies and, subsequently, own them privately. The "leveraged" means that these private groups use large amounts of newly-created debt--bank loans and other forms of debt--to raise the funds to buy the companies. The catalyst here is that speculation that certain publicly-traded companies might be ripe for picking by these private investors may increase the market price of their stock.
"Leveraged recapitalizations" are similar to LBO's in that such recapitalizations usually retire sizable amounts of the common stock of the publicly-traded companies involved by buying it in the in the open market and replacing it with newly-issued debt. Unlike companies involved in LBO's, these companies' stock remains publicly-traded--but, again, speculation that XYZ Co. is going to do such a recapitalization will tend to increase the market price of its stock.
"Corporate split-ups": When companies divest part of their structure by giving such parts outright to the original companies' shareholders or selling the parts to other parties. Again, speculation of such deals will tend to drive up the stock price of those companies. There have been many split-ups in recent years.
"Huge stock buybacks": Many companies have been for years buying back their own publicly-traded shares on the open market. Of course, this buy-back activity tends to increase the market value of the stock by increasing the demand of the companies themselves for it. There can be many reasons for buybacks: fewer shares outstanding will decrease the supply and, thus, tend to increase their market value (often making stock options of the companies' executives more valuable); if the companies pay dividends, there will be fewer shares outstanding in the future on which to pay them; the companies may not have plans to make large capital investments in the foreseeable future--construction of new plant, adding new product lines, acquiring other companies, etc.--buying back their stock is preferable to sitting on large amounts of funds above their needs. Frequently, some combination of these reasons lead to the buybacks.
The reference to Google as a "cult name" is because of its enormous success with its Internet search engine and related products. It only started up in September 1998 and had its IPO (initial public offering) in 2004--several years after many of its competitors were in operation. Yet, it leads the pack in revenues. I guess the Barron's columnist also includes Apple as a "cult name" because of its success in competing with Microsoft and other giants in the intelligence technology industry with its computer and its Ipod, and also because its new I-phone seems to have promise.
Following is some clarification as to the distinction between "quick catalysts" and "organic growth."
The former means that the price of a particular company's stock may rise in the stock market, not because of any increase in the intrinsic value of the company, but because of the actions taken by company management described above (the LBO's, leveraged recapitalizations, split-ups, and stock buybacks). Such activities often cause froth in the company's stock price temporarily.
Conversely, organic growth is genuine increasing of a company's value, as reflected in its stock price, from increasing profits and net worth from successful results of its operations.
However, it needs to be said that there are not always clear distinctions as to which of the two concepts might be causing a runup in the price of a company's stock at a certain time. Some observers might say that a catalyst from a particular action taken by a company--say a spin-off of a segment of the company that was not a good match with the rest of the company--is actually promoting future organic growth of the company.
Conversely, some skeptics might say that healthier earnings per-share increases of a company's stock are due just to buybacks--which have reduced the number of shares outstanding and, thus, automatically increased earnings per-share. Yet others may say that the buybacks are contributing to organic growth because they have reduced what was excessive equity capital, making the company leaner and meaner.
I take exception to the columnist's comment that there are only a "few other" companies achieving organic growth other than the two "cult figures" he names. There is a considerable number of companies around the world that, through skill in developing new or better products and services, producing them more efficiently, marketing them better, expanding profitable operations through acquisitions or through new startups (or perhaps through some combination of all these efforts), are increasing their value.
In the easy-money, deal-a-minute ethos of the present (stock) market, outsized attention is being paid to quick catalysts that create an instant one-time step increase in values--LBO's, leveraged recapitalizations, corporate split-ups, huge stock buybacks.
Ignored, by contrast, are genuine organic-growth stories, companies that seem able to keep increasing earnings even as the profit cycle matures and slows.
Apple (AAPL) and Google (GOOG) are the two biggest exception to this rule. All the growth seekers are crowded into these two cult names and a few others.
The "quick catalysts" that he refers to:
"LBO's" (leverage buyouts): When private investment groups buy out previously publicly-traded companies and, subsequently, own them privately. The "leveraged" means that these private groups use large amounts of newly-created debt--bank loans and other forms of debt--to raise the funds to buy the companies. The catalyst here is that speculation that certain publicly-traded companies might be ripe for picking by these private investors may increase the market price of their stock.
"Leveraged recapitalizations" are similar to LBO's in that such recapitalizations usually retire sizable amounts of the common stock of the publicly-traded companies involved by buying it in the in the open market and replacing it with newly-issued debt. Unlike companies involved in LBO's, these companies' stock remains publicly-traded--but, again, speculation that XYZ Co. is going to do such a recapitalization will tend to increase the market price of its stock.
"Corporate split-ups": When companies divest part of their structure by giving such parts outright to the original companies' shareholders or selling the parts to other parties. Again, speculation of such deals will tend to drive up the stock price of those companies. There have been many split-ups in recent years.
"Huge stock buybacks": Many companies have been for years buying back their own publicly-traded shares on the open market. Of course, this buy-back activity tends to increase the market value of the stock by increasing the demand of the companies themselves for it. There can be many reasons for buybacks: fewer shares outstanding will decrease the supply and, thus, tend to increase their market value (often making stock options of the companies' executives more valuable); if the companies pay dividends, there will be fewer shares outstanding in the future on which to pay them; the companies may not have plans to make large capital investments in the foreseeable future--construction of new plant, adding new product lines, acquiring other companies, etc.--buying back their stock is preferable to sitting on large amounts of funds above their needs. Frequently, some combination of these reasons lead to the buybacks.
The reference to Google as a "cult name" is because of its enormous success with its Internet search engine and related products. It only started up in September 1998 and had its IPO (initial public offering) in 2004--several years after many of its competitors were in operation. Yet, it leads the pack in revenues. I guess the Barron's columnist also includes Apple as a "cult name" because of its success in competing with Microsoft and other giants in the intelligence technology industry with its computer and its Ipod, and also because its new I-phone seems to have promise.
Following is some clarification as to the distinction between "quick catalysts" and "organic growth."
The former means that the price of a particular company's stock may rise in the stock market, not because of any increase in the intrinsic value of the company, but because of the actions taken by company management described above (the LBO's, leveraged recapitalizations, split-ups, and stock buybacks). Such activities often cause froth in the company's stock price temporarily.
Conversely, organic growth is genuine increasing of a company's value, as reflected in its stock price, from increasing profits and net worth from successful results of its operations.
However, it needs to be said that there are not always clear distinctions as to which of the two concepts might be causing a runup in the price of a company's stock at a certain time. Some observers might say that a catalyst from a particular action taken by a company--say a spin-off of a segment of the company that was not a good match with the rest of the company--is actually promoting future organic growth of the company.
Conversely, some skeptics might say that healthier earnings per-share increases of a company's stock are due just to buybacks--which have reduced the number of shares outstanding and, thus, automatically increased earnings per-share. Yet others may say that the buybacks are contributing to organic growth because they have reduced what was excessive equity capital, making the company leaner and meaner.
I take exception to the columnist's comment that there are only a "few other" companies achieving organic growth other than the two "cult figures" he names. There is a considerable number of companies around the world that, through skill in developing new or better products and services, producing them more efficiently, marketing them better, expanding profitable operations through acquisitions or through new startups (or perhaps through some combination of all these efforts), are increasing their value.
posted by Mycroft Watson at 7:57 PM
1 comments
http://rpc.technorati.com/rpc/ping