The Wrecked Techs

Since the tech bubble burst, there are a number of cash-rich busted-up and bombed-out tech stocks lingering around. Chris Mayer gives a lesson in how to sniff out the ones worth looking into…

When I first ran across this company, I thought there must be some mistake. How could there really be a $3 stock with over $8.5 per share in cash, and no debt?

A little research showed it was no error, but there are good reasons why it trades that way. Talk about a company with a knack for poor timing.

Remember Aether Systems? This was one of those jaw-dropping IPOs back in the day of the tech bubble. The shares opened at $16 on its first day of trading in 1999 and then soared to close at $48. Less than six months later, the stock was $315.

Back then, investors were enamored with Aether’s vision of delivering information over virtually any medium and David Oros was the chief visionary working out the recipe for the company’s mind-bending future.

But, as it turns out, what the company had really discovered was a recipe for losing over $1 billion.

Today, the company is just a shell. It has sold its old businesses and has only seven employees. It’s biggest asset is about $450 million in cash…and the more than $1 billion in accumulated losses, which can be used to offset taxes on future income.

The Collapse of the Tech Bubble: What Happens Now?

So now what?

The company has renamed itself Aether Holdings (AETH) and is looking to find a way to profitably use its cash.

It appears that a buyout is out of question, since the company has adopted anti-takeover measures, such as forbidding anyone from acquiring more than 5% of the stock without permission from the board of directors. Ostensibly, it has done this to protect the accumulated losses, because IRS rules forbid their transfer in the event of a change in ownership.

But Aether and profits don’t seem to mix well.

The company has decided to, get this, go into the mortgage business! It is investing its cash in mortgage securities. As of March 31, it had about $440 million invested in mortgage-backed securities.

Poor Aether…it seems timing is not their forte.

As rates have risen, the value of these mortgage-backed securities has declined. In the first quarter, the company lost $2 million on its mortgage investments. Profits prove elusive for Aether, as the White Whale evaded Ahab.

In the second quarter, the company finally turned a small profit. For long suffering shareholders, it must have felt like a miracle, like turning water into wine.

The Collapse of the Tech Bubble: Some Still Have a Pulse

Interestingly enough, there are a number of cash-rich busted-up and bombed-out tech stocks lingering around. Some are like Aether, mere shells. For others, there is something closer to a pulse. Many have loads of cash.

More recently, the idea has gotten some attention in the mainstream press. On August 25, the Wall Street Journal ran a small piece on "Cash Stockpiles" that featured eight stocks – all of them technology companies. And the latest Barron’s cover story is about "cash cows and buyout bait," as they put it, which included mainly cash-rich tech stocks.

I ran a scan of the nearly 9,000 stocks in the market and found 808 stocks where cash per share exceeded the price of the stock. In that dustbin, you’re bound to find a lot of troubled companies and a lot of dogs, like Aether, that can’t seem to do anything right. But, every once in awhile you’ll find as company with some real possibilities.

The idea is not original with me, as others have profitably mined this area before. James Altucher created a "cash index," which originally appeared in a 2002 article in Street Insight. Altucher is a partner in the hedge fund Formula Capital. In his piece, Altucher unveiled a strategy of buying stocks whose cash hoards exceeded their market cap. He picked 11 stocks in the article using this method. Within six months, the portfolio was up over 100%.

In today’s economy, the market is littered with wrecked tech stocks.

Usually, these types of companies will be small software companies or telecom has-beens, the kinds of companies that struggle along making small profits or small losses. As a result, they often trade for large multiples of earnings, assuming they have positive earnings.

However, the enormous amount of cash on the balance sheet usually accounts for the bulk of their market cap, and then you find the underlying business trading for hardly anything at all. These kinds of companies can be attractive acquisition targets. A large company may view it as a cheap way to gain access to a certain technology or process, or may think it can apply the target’s technologies to enhance its own products, or perhaps more effectively market the existing technology over its wider customer base.

In any event, these kinds of situations are like waiting for lightning to strike. Owning these companies is like dangling a key on the string of your kite and setting it off during a storm. If it strikes, the results are dramatic.

In any event, I think this is an interesting phenomenon and I’m betting it will be profitable to speculate among in the wreckage of the great tech bubble.


Chris Mayer
for The Daily Reckoning

September 06, 2005

P.S. My own CrisisPoint Trader Cash Index looks for businesses with enormous amounts of cash relative to the price of the stock in the marketplace.

The idea of playing these cash-rich tech stocks is a theme I’ve explored in CrisisPoint and I’ve recommended two plays on the theme, both are profitable so far.

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and the Fleet Street Letter.

In addition to all of that, Chris somehow finds the to time to meet with Addison Wiggin, and the rest of the great investment minds that make up Agora Financial, once a month – and, for the first time ever, you can join the ranks of this elite crew.

"We have the world’s most incompetent empire," says our Pittsburgh correspondent, Byron King.

More evidence comes every day. The United States cannot finance its own budget, without making itself beholden to communist lenders. Nor can it defeat a handful of backward fanatics in Mesopotamia and the Hindu Kush. Nor can it still the wind or water…nor even succor its own citizens who slip beneath the waves.

U.S. markets were closed yesterday for Labor Day. Gas prices rose over $3 nationwide. Prices as high as $4 were reported.

Of most interest to the media continues to be remarkable story from the Big Easy.

We turn to the English press for illumination and entertainment:

"Dead Calm," is how the Daily Mirror describes the situation yesterday, with a photo of a body floating face down in the street. More than 10,000 bodies might be discovered, says the paper, as the relief effort continues. "A Sea of Bodies in New Orleans," says a headline, perhaps exaggerating.

The Independent graces its front-page with a photo of a makeshift grave. "Here Lies Vera," says the handwritten marker, "God Help Us."

"She was an ordinary woman who, like thousands of her neighbors, died because she was poor," explains The Independent. "Abandoned to her fate as the waters rose around her, Vera’s tragedy symbolizes the great divide in America today." (Further reading reveals that Vera was not a victim of the rising water, but of a hit and run driver…nor did she die because she was poor, but because she lived in a town rich enough to have automobiles.)

The Daily Express, meanwhile, focuses neither on the morbid nor the sentimental:

"I saved my daughter from rape by looters," a British professor tells the paper. (Further reading suggests that the man may have exaggerated his own heroism. Gangs only shouted "sexual abuse" at his daughter and "racial abuse" at the family. They were not attacked.)

Thus does the British news media see things in the Deep South, not too differently from the way the American media sees them: the government should have done more to help the poor who, as we all know, can be vicious, slobbering animals if they don’t get handouts and billyclubs when they need them.

In yesterday’s International Herald Tribune, liberal columnists howled over the handling of the crisis by the Bush administration. (The word "incompetence" was used more frequently than a teenager uses the word "like.") Maureen Dowd went so far as to call Bush’s head of the Federal Emergency Management Agency (FEMA) a "blithering idiot." Here, we feel compelled to rush to his defense. He may be an idiot, but we see no reason to think he blithers any more than any other federal official.

There is a foul stench to the whole discussion. The gist of the liberal position is that if the Bush administration had not been so incompetent at killing poor people in Iraq, it might have saved some poor democratic voters in Louisiana.

The gist of the conservative position is that lawlessness in Iraq represents a threat to our way of life; besides, our way of life is one in which people look out for themselves, unless they represent a significant voting block.

Neither political party, nor ideology, disputes the major principle of Late Empire: the imperial government should provide bread and circuses at home (including protection from flood, storm, pestilence, and famine)…and seek to improve the world by engaging in almost constant wars all around the periphery.

The argument is only about which bunch of incompetents will do a better job of it.

Had Katrina struck during the reign of William J. Clinton, rather than that of George W. Bush, we doubt that there would be one single fewer body floating face down in New Orleans. On the other hand, by so openly and proudly taking on imagined enemies overseas, Mr. Bush has raised expectations. He has offered to make the world a better place than the place people make of it on their own. He showed himself ready to send troops wherever he thought they were needed. He made it clear that no sparrow could fall anywhere in the world without it being a cause of concern to the snoops and world-improvers in Washington.

If the all-knowing, all caring authorities in Washington would notice the falling of a sparrow between the Tigris and the Euphrates, wouldn’t they also see when a taxpayer drops along the Mississippi? If the Pentagon could send troops to Iraq on a whim, wouldn’t they rush them to the Gulf Coast on a worry?

By intervening so readily with guns in Baghdad, the citizens of Biloxi were encouraged to hope for more butter. When they didn’t get it, they turned a little sour.

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Wall Street…

"My publisher has created a pretty amazing new offer: A lifetime subscription to selected investment letters and conferences…Sometimes more really is more!"


Bill Bonner, back in London:

*** All last week, I made it known that the greatest financial announcement since Martha Stewart got her shiny new ankle bracelet would be made on Friday. And sure enough, Addison and his team did not disappoint.

Now for the first time ever, dear reader, the Agora Financial Reserve is open to you. But I expect memberships, like $3.50 gas, will be hard to come by for much longer.

The Reserve is a lifetime commitment to investment excellence – at a very discounted price. It’s a way for you to get an ongoing stream of research, recommendations, reports, books and conferences pertinent to the financial world for the rest of your life. It’s a way for you to stay on the forefront of the news cycle. And it’s a way for you to potentially make a lot of money.

*** "Housing boom may continue experts say," a New York Times headline tells us. The LA Times tells us that people are still eager to ruin themselves to get onto the great housing bubble before it is too late. Many households now spend 30% of their pretax income, says the paper, just to cover their mortgage payments. Some spend as much as 50%.

But it’s worth it, say delusional buyers. "We’ll have to struggle for a while, but it is worth it for the house," said one young homeowner. The man had just committed himself to pay $500,000 that he didn’t have for a house he didn’t need. He got it with 100% financing. In other words, to call him a "homeowner" is a stretch. He is a speculator. What he has is something akin to an option to buy a house for a half million dollars. If the house rises in price, he will exercise the option. If it falls, he will walk away – with certain penalties.

Another buyer said he bought a house but had no money for furnishings. "I ate dinner in my car," he says. "I made house-buying a goal. It’s worth it knowing I have a home."

*** Here in London, house prices are falling – slowly, almost imperceptibly, but the statistics say prices are coming down.

They have a long way to go. Elizabeth is house hunting. We are camped in your editor’s bachelor pad…until a suitable rental can be found.

"There are many places to see," Elizabeth reports. "You can pay as little as 1,000 pounds per week for a three-bedroom house in South Kensington to 3,000 and beyond. The expensive ones have better bathrooms and decorations…but they’re not that different."

"Wait a minute. Who would pay 3,000 pounds per week for a rather ordinary house? That’s more than $250,000 a year!"

"Well, if you want to live in central London, it’s going to cost a lot of money. There’s no way to get around it. There are so many people with so much money to spend. It is really amazing."

*** The boys began school yesterday. They are going to the French lycee in London, so they will be able to continue in the same system when we return to Paris.

"How did it go?" we asked.


"Could you give us more details?"

"Well, we had to take a test in English. They wanted to see how good we were in English so they’d know what section to put us in."

"Shouldn’t you be in the bilingual section? English is your native language."

"They have a special section where they teach in English and French equally," Elizabeth explained. "But it’s not open to bilingual students. The boys will be in the section where they learn English as a foreign language."

"Hmmm…does that make any sense? Well, you boys should have done very well on the English test, so at least you’ll be in the most advanced section."

"I didn’t do very well," Edward, 11, admitted.

"Why not?"

"I figured that if I didn’t do well they’d put me in an easy class."

The Daily Reckoning