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Commodities Are So 2011: Why It's Tech's Turn to Pop and (Maybe) Top

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Companies like LinkedIn, Groupon, Pandora, and Zynga have few tangible assets and have immense competitive challenges to justify their current valuation.

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Large IPOs often mark tops within sectors and within stock markets as a whole. In June 2007, shortly after the you-know-what had begun to hit the fan in the financial stocks, Blackstone Group (BX) was able to get a multi-billion-dollar IPO in. About a year and a half later, Blackstone was down about as much as the Dow Jones fell between its 1929 peak and its mid-1932 nadir-- almost 90%. Talk about getting out on the last helicopter leaving Saigon!

Fast-forward a few years until the indigestion amongst Western investors allowed them to stomach a "hot" non-Chinese IPO:

Last year, Glencore (GLNCY.PK) (a gigantic commodities trading company) announced it was going to float an about-$60 billion IPO in London and Hong Kong. It went public in May; the stock promptly went straight down, just as Blackstone had done four years earlier. Was it a coincidence that spring 2011 also marked the top for most commodities and almost all commodity stocks?

Then, last year, memories of the crash had finally faded enough that the time arrived for US investors to become the quacking ducks that, as always, Wall Street had food for. And of course, tech was there as the most palatable food. First there was LinkedIn (LNKD) in May, then Pandora Media (P), which is half off its high; then Groupon (GRPN) and Zynga (ZNGA).

Recently, Facebook decided it was time to liquefy its stock. This is the big tech IPO for this cycle. This IPO will make the year for many in the financial community. The valuation is bruited to be around $100 billion. We are definitely not at a 1999 level of insanity, as all the above companies are "real." But these stocks are, in general, overvalued -- or at least were, at the times of their 2011 IPOs as listed above (it's too soon to comment on Facebook). These companies have few tangible assets and have immense competitive challenges to justify their current valuation. I know from an insider at Facebook that the private market valuation -- soon to be the public valuation -- has skyrocketed over the past year and a half. But I doubt that there has been all that much surprise in that same time frame in its operating results -- after all, Facebook was the clear winner in its space by 2010. So my view is that the price has been marked up for retail distribution. All in a day's work for the Street.

In the period until the Facebook IPO is expected this spring, I would be on the watch for market patterns to recur, and here are two examples of how they are currently, in fact, happening.

First, JPMorgan Chase (JPM) has now put out a detailed, bullish research report on Apple (AAPL). Now. Talk about being late to the party! JPMorgan is not necessarily a player against which to be contrary, especially in the short term. But let us note that there are not a lot of avowed bears on Apple's stock valuation in the mainstream investment community.

Second, and even worse, a recent posting raised in all seriousness the question of whether there would be a shortage of Apple stock should demand for it spike through the roof in the event the company declared a cash dividend. A shortage of stock? Ha! That reminds me of the alleged shortage of Treasurys in 2000 given the prospect for unending budget surpluses. When the media starts positing a shortage of stocks or bonds...uh-oh.... (Note I am long Apple.)

All may be well, and all manner of things may be well in investment-land despite this discussion. What I am saying is definitely not a timing call, but my point is to remind readers that these major IPOs and runs of hot IPOs in a single sector do not happen in a vacuum. They are not the result of a philanthropic attitude amongst corporate insiders or the financial community. Facebook could raise every penny it needs, and more, from private sources. UPS (UPS) stayed private for so long as it grew massively that a regular system of stock sales occurred to let long-termers cash out their UPS stock. Facebook does not need to become a public company to get known. If the insiders are planning to generate unanticipated profits on an undreamed of scale, why share them with us? Why accept the costs and scrutiny of being a public company?

In contrast, there's nothing like investing in a neglected market or "discredited" but essential sector to provide a long-term margin of safety (i.e., think different) for an individual investor trying to time hot plays. Might that be, for example, US natural gas exploration companies or small, strong community banks? Is Wall Street cheerleading either of those sectors right now? The answer is no. Thus, there may be good long-term relative value in those sectors -- as well as the usual garbage, one should point out.

I think that most individuals should take a Roman view when the Facebook books are opened to the public.

Caveat emptor: Let the buyer beware.

Editor's Note: This article was originally published at The Daily Capitalist.
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