Comparing Apples to Mainframes: A Lesson In False Comparisons

10 Feb

Earlier today, CNBC’s Gary Kaminsky (who should damn well know better!) shared a 10-year chart of IBM’s stock performance with that higher-end grocer Whole Foods.  The former started trading in 1962, the latter, in 1992.  The former was founded 100 years ago, and has been one of the cornerstones of the American economy and American innovation since.  The latter was founded 30 years ago and has made it’s money with a relatively smart supply-chain, effective marketing/brand-building, etc.  Why are we comparing these two firms over this time period, prey tell?

IBM’s market cap is ~$200 BILLION.  Whole Foods’ is ~$10 BILLION.  Are there ANY firms even remotely the size and age of IBM that’ve seen their stock gain 250% over the past decade?  The only large-cap firm I can think of that’s seen such growth is Apple, but Apple is an outlier even amongst tech stocks.

Since 1962 (earliest available data), IBM is up 6,566%. WFMI up 1,898% since ’92 (same).  Every Finance 101 student knows that generally, returns for more mature firms underperform those for younger growth firms; It’s much easier (ceteris paribus) for a firm to grow from a $3.5 billion market cap to a $9 billion market cap over a decade than it is for a $65 billion, 90-year-old company to grow to a $200 billion one.

I have absolutely no clue what point Kaminsky was trying to make besides obtusely stating the obvious.  Let’s think about this, though.  IBM stock has a 30-year advantage over WFMI.  What are the odds that 30 years from now, WFMI triples in value?  To put that in perspective, WFMI is valued at 2.5x Walgreen’s (p/e basis) and has a 10.5bn market cap, while Walgreen is worth ~$40bn.  Surely over the next 30 years WFMI’s valuation multiple is going to contract and revert closer to the industry/historical average, so in order to really grow 3x it’s going to have to increase EPS even more than that!

Charts are nice and all to help visualize data, but if we look at charts, datapoints, etc alone we’re only getting a very small piece of the picture, the proverbial tip of the iceburg.  I recently had a discussion on Twitter with a structured credit guy who argued that since spreads on MBS (etc) were narrow pre-crisis no one knew about the impending doom.

My response was simple: you can look at charts and spreads till you go numb in the eyeballs, but if you look at what’s behind them, do the primary, fundamental research, you’ll have a much better understanding of what’s REALLY going on (or about to).  Michael Bury and the other investors who looked around and realized what was going on got it right.  Those sitting behind their banks of screens in New York (or wherever) largely didn’t.

Don’t be afraid to take a look behind the curtain, no matter how afraid you are of what you might find.  Seldom are the times where blissful ignorance remains such.


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