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Hey, Modelman! Do you trust ChoicePoint's stock?
No, not after hackers were easily able to extract personal information on 145,000 people from ChoicePoint's computer systems. Plus: An update on market forecasts and more on Google's valuation.
By Jon D. Markman
Every few months, the author of this column answers questions from readers who implore, Hey, Modelman!
Hey, Modelman: What do you think of the ChoicePoint (CPS, news, msgs) scandal? Is the stock a buy now?
Modelman: Its probably unfair to call a companys mission wicked if its products dont kill or maim people, but lets just say it anyway. ChoicePoints business is to discover, acquire and maintain records on everyone so that they can be used to deny credit, employment, insurance or admission to myriad venues. Since being spun off from Equifax (EFX, news, msgs) in 1997, its shares advanced tenfold on the wings of authorities quest to categorize customers and citizens by creditworthiness. The idea is that in a nation built on debt, companies and governments need as much data as possible about individuals to build accurate actuarial tables aimed at predicting the potential payback. Fair enough.
Identity profiles are built on trust, however, and last month we learned that ChoicePoint violated its customers confidence in a big way: The company was a victim of an absurdly easy-to-spot Nigeria-based identity scam that compromised 145,000 customer profiles. Not long afterward, we learned that rival LexisNexis, a unit of the Anglo-Dutch data conglomerate Reed Elsevier (ENL, news, msgs), likewise purposefully placed more than 30,000 customer profiles in the hands of scamsters. And now we hear that Bank of America (BAC, news, msgs) has lost the details of 1.2 million government customers, probably to identity gangsters.
If Willie Sutton -- who famously said he robbed banks because thats where the money is" -- were alive today, he would undoubtedly would be preying on companies like ChoicePoint, as access to Social Security numbers and dates of birth are keys that open the portals to our digital identities. Federal regulators and legislators are now responding and making noises about reining in the data bureaus power. And the company itself said it was stepping back from the most heinous (and coincidentally, low-margin) personal-data work.
The company said it would lose less than 5% of its business, and that may be true. But its hard to put the genie back in the bottle. Trust has an ethereal quality, and it is not easily rebuilt. My guess is that ChoicePoint -- which sold off from a high of $47.95 to a low of $36 on its bad news but has since rebounded to about $40 -- will struggle going forward. Even after the recent decline, its not cheap with a forward price/earnings multiple of 22 weighed against uncertain, but definitely slowing, forward growth estimates of less than 15%.
I could be proven wrong if customers decide to turn a blind eye to its criminal, financial and social assaults. But I would stay away from this company. Just as socially responsible investors of old have profitably steered clear of tobacco and alcohol manufacturers, it seems that investors intent on taking a stand against privacy invasion could likewise take a successful stand against personal-data distributors.
Related news and commentary on MSN Money
Hey, Modelman: Two months ago, you wrote that the cycle guys were bullish, and they got the turn right. ("Cycle analysts aim to call the market turns) Whats their view now?
Modelman: That column ran on the day of the exact bottom for the year so far. In an interview, Tom McClellan told me that his cycle work forecast a strong rally that week, followed by a decline into a nine-month cycle low in June, and then a top in August-September. So put a W on the boards for the cycle analyst.
Now McClellan sees crude oil making a second spike up that is an echo of the gains made last October. He is looking for a one-month decline in the commodity into early April that will be accompanied by a concomitant rise in equities. (To forecast oil, he uses the price of gold lagged by 11 months for reasons that are somewhat obscure, but the methodology seems to work.)
If that does occur, he sees the potential for impressive buoyancy in equities as there appears to be sufficient liquidity -- that is, money sloshing around that can move into stocks from commodities. One metric that he uses is a proprietary version of the New York Stock Exchange advance/decline (A/D) line. When it is rising, as it is now, the forces of supply and demand favor buyers. Importantly, he said, the market never experiences crashes when the A/D line is rising, and recently it hit an all-time high. In contrast, before the 2000 bear market erupted, the A/D line had topped in 1998 and had been falling for two years as money was being funneled into fewer and fewer stocks -- largely, big-cap techs.
If the market follows past cyclical patterns, McClellan further forecasts that small-cap stocks will lose their dominance over large-caps. That means that bigger company shares will either rise faster than the smaller company shares or, in the event of a broad sell-off, decline less. His bet is that a decline in crude oil prices will end in mid-April with energy bears proclaiming that the commodity will return back below $40 per 42-gallon barrel. He then sees crude rising back toward $60 toward the end of the year.
Hey, Modelman: Funny how you didnt mention Google's (GOOG, news, msgs) gross and net margins, revenue and profit growth, but did mention Yahoo, Amazon and your beloved Symantec (SYMC, news, msgs) in your column How 3 Internet titans survived the dot-com bust. It would have blown your argument that Google is overvalued. Google is massively profitable, while most of the dot-coms didnt have any profit (and some didnt even have revenue!). . . . So its easy to build a search engine, ehhh? Well, its easy to brew a cup of coffee, too, and look at Starbucks. They have no competition anywhere near them despite such a simple and replicable product. Point is, the product is the easy part. It's everything else in building a business thats difficult.
Modelman: It is true that so far Google has been phenomenally successful at monetizing search, an effort that eluded Microsoft (MSFT, news, msgs), the publisher of this site, for years, as well as so many prior competitors, like Inktomi. But you still must answer two questions for yourself: Is the business model sustainable? And are investors overly optimistic about the sustainability of current income streams?
EBay (EBAY, news, msgs) built an online auction community for which there was virtually no substitute once it gained sufficient size to beat back attempts by Amazon.com (AMZN, news, msgs) and Yahoo! (YHOO, news, msgs) to get into the business. Yet while people have adopted googling into their lexicon to mean searching for information online, there is truly no way for Google to ensure it can monetize the concept forever. And even if it could, the current price -- 15 times sales and 125 times earnings -- forecasts preposterous earnings growth well into the next century.
Indeed, in an interview with Barrons on Saturday, canny value investors Ben Fischer and Cliff Hoover of NFJ Investment Group reported that their work suggests that Google is priced to discount actually the next 2,000 years worth of earnings. That view doesnt dispute the notion that Google is a fine and successful company -- only that overly enthusiastic share buyers are paying too much for it at present, much like paying $400,000 for a really nice Mercedes-Benz sedan that is really only worth $75,000. That is, Google may be worth a lot -- but nowhere near that much. And if the growth appreciably slows, the price will be slammed.
Fine Print
No "Hey, Modelman!" would be complete without a gratuitous swing at Sirius Satellite Radio (SIRI, news, msgs). Many readers have asked if its cheap enough yet. The answer is a definite maybe. My Dec. 8 column "iPod vs. satellite radio: Serious trouble for Sirius," which brought out the Siri boo-birds en masse, said that as far as investments were concerned, the active listening experience represented by the iPod of Apple Computer (AAPL, news, msgs) had outgunned the passive experience of listening to any kind of radio, both terrestrial and sky-based. Since then, the differential between the two stocks has continued to diverge negatively for the Sirius crowd. Apple is up 29% and Sirius is down 22%. . . . With the understanding that Sirius is still wildly overvalued by most conservative metrics, it would seem that a price in the low $5s to high $4s will probably turn out to be the local low for the stock. Even if it does not go up a lot from here right away, it will probably be accumulated at that level. My guess is that, unless a satellite goes down or either talker Howard Stern or CEO Mel Karmazin exit the picture, the stock will never see the $3s again. Although in a serious downtrend now, I would look to pick up shares in the $4.30-$4.75 area, if it gets there. . . . To learn more about ChoicePoint, visit its Web site. The company has posted its response to Congress on this page. . . . To check out Tom McClellans excellent weekly and bimonthly subscription newsletters on market cycles, visit his Web site. . . . To learn more about Chinese universities, where the next Google might come from, visit this page. . . . Many people consider Dalian University of Technology to be one of the best. For more about the university, click here or here.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in one stock mentioned in this column: Symantec.
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