Getting Wary of the Wild-Eyed Valuations

 | Feb 25, 2014 | 1:03 PM EST  | Comments
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Look, it's about the two-track. It's about the price targets. It's about Tesla (TSLA) being up huge today on an analyst call. It's about the possibility that Facebook (FB), a company I like very much, is paying $19 billion for a company that must be monetized perfectly.

It's about being careful, and not careless.

Right now we have two markets. One is solidly rooted in fundamentals, rewarding good numbers with slightly higher multiples on those numbers. The other is rewarding good press and marketing with billions of dollars in market capitalization.

The good news? That second track isn't repugnant, yet the people making the wild-eyed calls aren't seeking investment-banking business or notoriety. The Morgan Stanley analyst who took his $153 price target for Tesla to $320 today -- yep, more than a double -- is someone who has nailed this stock nine ways to Sunday. He's been terrific. So maybe that even entitles him to the $500 bull case. But, in order to get to that price, Tesla has to be more than a car company, because it will then have a value north of those of General Motors (GM) and Ford (F). Those names aren't fast growers, but they're not slugs either.

In order to get to that price, you have to have Tesla, and I quote, "disrupt a trillion $ electric-utility industry with a revolutionary battery." I guess if anyone can do that, it's CEO Elon Musk. Can we at least recognize, though, that Musk has to be able to expand mass production of lithium ion battery packs at a level that seems almost mythological in leap?

Now, I know that if I hadn't traded through the 1999-to-2000 period, I probably wouldn't care about this kind of price-target jump. Yet, for me, it feels like yesterday that Walter Piecyk -- a pretty serious analyst -- on Dec. 23, 1999 slapped a $1,000 price target on a $503 stock, chipmaker Qualcomm (QCOM). That move jumped Qualcomm shares 30% in a day. Yep, it closed up 156 points, and the giddiness was extraordinary.

Now, Piecyk, at Paine Webber at the time -- yep, Paine Webber -- was oddly right when he wrote that this stock was, and I quote, the "appropriate way" to invest in wireless voice and data. Qualcomm sure did become one of the survivors of an industry that turned into leader. It was a "primary beneficiary of the convergence of data and wireless," as he wrote in his note. Qualcomm did nail the CDMA technology that has led the industry for 15 years.

But it was the hoopla, the $1,000 target, that sucked in so many people. Needless to say, the stock never got there, although after a split it's almost back to where Piecyk took it with that ill-fated call.

Now, there are huge differences between now and then, and I don't want to be crying wolf when "wolf" isn't warranted. For one, there were many Qualcomms back then, and not all of them were appropriate investment vehicles. In fact, of those that came public in that era, 300 folded. There were many companies that had no basis in fact or actual value.

Tesla, on the other hand, is profitable -- although people, particularly shorts betting against it, seem to contest that profitability.

We saw massive insider selling back then. We are not getting that now.

The Nasdaq also went to levels back then that, as we look back, can only be described as insane. The index has now returned to highs last seen 14 years ago, when it hit that historic top. Still, the Nasdaq 100, at 3688, is still about 1000 points off its level from that year.

I just want to stay focused. The crazy target boosts were part and parcel with the dot-com era, and I don't want to repeat that period. If we stay on one track with some one-off stocks, we will be fine. But if that second track grows, then we're just going down the wrong line, and that's when the fun ends and the pain begins.

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