Oct. 20–The cult of growth is back. Analysts and investors are now pushing stocks selling at 30 and 40 times their annual profits, because they believe these companies can grow by at 30 percent or40 percent into the foreseeable future.

The problem is they can’t.

Many companies can grow rapidly over a short term. Analysts look at the next quarter or year, and suggest the short term growth is sustainable into the long term future. But few can sustain that rate, and companies selling in anticipation of that kind of performance often disappoint. In fact, industries that have the highest growth rates, also have the highest mortalities.

Think about casual dining restaurants. Analysts are suggesting many of these stocks can sustain growth rates of 30 percent or more. But over the past 50 years, no chain, except perhaps Starbucks and McDonald’s, has sustained growth for even a decade.

Wall Street is littered with hot concepts like Rainforest Café, Planet Hollywood, IHOP, Chart House, Howard Johnson’s, and Boston Chicken, that hit the wall, as consumers wanted something new.

The same holds true in retailing. When they are rolling out stores, many retailers look hot. But look back 20 years, and name a retailer that has an uninterrupted growth record.

Wal-Mart, you say? Its secret is that it’s a logistics company that can distribute products cheaper and better than anyone else. Wal-Mart doesn’t thrive because it has great merchants. It thrives because it can keep its stores in stock and sell for less.

Look at some former high flyers, like Just For Feet, Sports & Recreation, Merry-Go-Round, Edison Brothers, J Baker, Service Merchandise, Best Products, Levitz Furniture, and Paul Harris. These were darlings of growth investors, until fashion and competition changed. Then, they all went bankrupt.

The biggest sucker game comes in technology. There is no such thing as a long term tech growth company. Technology changes too fast. Just when a company seems to be riding the crest, someone invents something new, and the crest turns into foam.

Remember Compaq, the great PC company? Digital Equipment, which dominated mini-computers? Or Control Data, U.S. Robotics, 3 Com, Novell, Wang, Iomega, Lotus, Netscape? How about Xerox, Polaroid, Kodak, Lucent, Nortel? These were all once dominant companies that analysts claimed would sustain high growth. In each case, they were done in by newer technologies, lower prices, or slowing markets.

You may claim Microsoft, Dell, and Intel are successful tech companies with unblemished growth records. But they aren’t.

Dell is a distribution company. Like Wal-Mart, its advantage is its ability to sell cheaper and faster than the competition.

Microsoft is a gate keeper. Its primary skill has been its ability to copy others, then muscle the competition out of business.

Intel does classify as a tech company, but without its Wintel alliance with the gate keeper, Microsoft, its record would have been much choppier.

In fact, because fashions and technology change so often in, a case can be made that high flyers in these industries should sell at a discount, not a premium to their growth rates.

I’m neither smart nor agile enough to know when the growth party is coming to an end. Great companies don’t usually implode. They just start slowing down. The handwriting is on the wall, but investors don’t listen.

Right now, investors are getting sucked back into growth. They look at the short term results, off depressed levels, and give stocks prices that assume long term returns. This style of investing hasn’t worked in the past, and it won’t work now. Speedy growth may look seductive in this market. But remember, speed kills.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

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Oct. 20–The cult of growth is back. Analysts and investors are now pushing stocks selling at 30 and 40 times their annual profits, because they believe these companies can grow by at 30 percent or40 percent into the foreseeable future.

The problem is they can’t.

Many companies can grow rapidly over a short term. Analysts look at the next quarter or year, and suggest the short term growth is sustainable into the long term future. But few can sustain that rate, and companies selling in anticipation of that kind of performance often disappoint. In fact, industries that have the highest growth rates, also have the highest mortalities.

Think about casual dining restaurants. Analysts are suggesting many of these stocks can sustain growth rates of 30 percent or more. But over the past 50 years, no chain, except perhaps Starbucks and McDonald’s, has sustained growth for even a decade.

Wall Street is littered with hot concepts like Rainforest Café, Planet Hollywood, IHOP, Chart House, Howard Johnson’s, and Boston Chicken, that hit the wall, as consumers wanted something new.

The same holds true in retailing. When they are rolling out stores, many retailers look hot. But look back 20 years, and name a retailer that has an uninterrupted growth record.

Wal-Mart, you say? Its secret is that it’s a logistics company that can distribute products cheaper and better than anyone else. Wal-Mart doesn’t thrive because it has great merchants. It thrives because it can keep its stores in stock and sell for less.

Look at some former high flyers, like Just For Feet, Sports & Recreation, Merry-Go-Round, Edison Brothers, J Baker, Service Merchandise, Best Products, Levitz Furniture, and Paul Harris. These were darlings of growth investors, until fashion and competition changed. Then, they all went bankrupt.

The biggest sucker game comes in technology. There is no such thing as a long term tech growth company. Technology changes too fast. Just when a company seems to be riding the crest, someone invents something new, and the crest turns into foam.

Remember Compaq, the great PC company? Digital Equipment, which dominated mini-computers? Or Control Data, U.S. Robotics, 3 Com, Novell, Wang, Iomega, Lotus, Netscape? How about Xerox, Polaroid, Kodak, Lucent, Nortel? These were all once dominant companies that analysts claimed would sustain high growth. In each case, they were done in by newer technologies, lower prices, or slowing markets.

You may claim Microsoft, Dell, and Intel are successful tech companies with unblemished growth records. But they aren’t.

Dell is a distribution company. Like Wal-Mart, its advantage is its ability to sell cheaper and faster than the competition.

Microsoft is a gate keeper. Its primary skill has been its ability to copy others, then muscle the competition out of business.

Intel does classify as a tech company, but without its Wintel alliance with the gate keeper, Microsoft, its record would have been much choppier.

In fact, because fashions and technology change so often in, a case can be made that high flyers in these industries should sell at a discount, not a premium to their growth rates.

I’m neither smart nor agile enough to know when the growth party is coming to an end. Great companies don’t usually implode. They just start slowing down. The handwriting is on the wall, but investors don’t listen.

Right now, investors are getting sucked back into growth. They look at the short term results, off depressed levels, and give stocks prices that assume long term returns. This style of investing hasn’t worked in the past, and it won’t work now. Speedy growth may look seductive in this market. But remember, speed kills.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

—–

To see more of the Daily News, or to subscribe to the newspaper, go to http://www.NYDailyNews.com

(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

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Oct. 6–On Friday morning, I found myself sitting in a classroom listening to a lecture entitled “Do CEOs Have Too Much Power in American Corporations?”

The professor started with compensation, pointing out that incentive based pay had gone from 3 percent in 1986 to 66 percent in 2001. He said such high incentives encouraged executives to play with the numbers, and recommended more indexed based pay. He said CEOs were too powerful, and recommended splitting the job of CEO and chairman. He talked about cronyism on corporate boards. He said chief financial officers were compromised, pointing out the most admired CFOs for three years running had been those at Enron, WorldCom, and Tyco, and that all three were now under indictment.

He also noted that in a survey, 15 percent of all CFOs said they had been asked to falsify documents by their CEOs. I don’t know what is more scary, that CEOs would ask to falsify books, or that CFOs would confess to it in private but not in public.

The professor attacked auditors, who helped CEOs disguise earnings, and noted that companies, like IBM and Citigroup, had padded earnings with accounting gimmicks. He also attacked Congress for holding off actions by regulators. This professor was taking no prisoners.

What made the lecture especially interesting was the venue and the students. This was not some left wing college. Rather, it was reunion weekend at Harvard Business School, and the room was filled with senior executives and directors of major American corporations.

One student, CEO of Colgate-Palmolive, protested, claiming the professor was unduly harsh. He said most companies were honest and that too much regulation could destroy the American system. His points were well taken, but by no means universally supported. Most interesting was the liveliness of the debate in a classroom of the West Point of Capitalism.

At the end of the meeting, a graduate in the front row said Wall Street had put itself in an artificial straight jacket by its “insane preoccupation with earnings per share — one of the worst measures known to man.” This blunt statement didn’t come from a radical reformer. Rather it was uttered by Bill Donaldson, chairman of SEC.

The next class was called “Innovation Corrupted — The Pathology of Enron’s Collapse.” Here at the school that trained Jeff Skilling and many other former Enron execs, was Prof. Mal Salter playing pathologist. He explained Enron didn’t die in 2001. Rather it died in 1997, when it began to gamble to survive.

Salter described how a company with an innovative idea got caught up in its own greed, lost control of its internal systems, and turned to reckless gambling. Then he asked how executives, auditors, boards, banks, analysts, rating agencies, press, and even Harvard Business School missed these games that occurred in plain sight and over an extended period of time.

The lecture was fascinating for its content, and for the reaction of the high profile execs in the audience, who wanted to understand what had happened.

Other lectures dealt with such subjects as governance of corporate boards, the boom and bust cycle, declining economic conditions in the Third World, and the impending crisis in health care.

This is a dramatic change. Five years ago, at my last reunion, most lectures focused on the Internet, new technologies, the global economy, and getting rich. Now there’s been a sea change.

Harvard Business School has chosen to confront issues such as corporate governance and corruption head on. From the response of the people in the classrooms, so have its high profile graduates. This is a change that could have far reaching implications in reforming American corporations.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

—–

To see more of the Daily News, or to subscribe to the newspaper, go to http://www.NYDailyNews.com

(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

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