High-growth corporations are on everyone's radar. They are on the radar of Fortune's, Forbes', and Businessweek's lists of the world's most admired corporations. They are used by business strategists as benchmarks for other companies to follow. They are the "rising angels" on the radar of momentum investors.
The problem, however, is that corporate growth doesn't last forever. In almost every case, the time comes that corporate growth slows and the company falls from everyone's list. The table below gives a list of seven such stocks that topped Fortune's 100 fastest growing companies in 2005, but they didn't make it to the 2012 list. Two of them, Vineyard National Bancorp and Edge Petroleum are no longer around; the first was taken over by the Feds in 2009, while the second filed for bankruptcy. What caused this downshift in economic growth? Which of these companies is a buying opportunity?
Like economies, corporations undergo virtuous and vicious cycles fueled by positive and negative spillover effects associated with the success and failures in performing their three basic business functions: The social function, the entrepreneurial function, and the managerial function. Entrepreneurial and managerial success, for instance, supports and reenforces social success; while social success supports and reenforces entrepreneurial and managerial success, the corporation rides the virtuous growth cycle, where success breeds more success. Entrepreneurial and managerial failure, by contrast, is followed by social failure; while social failure supports and reenforces managerial failure, the corporation rides the vicious growth cycle where failure breeds more failure. Yahoo's (YHOO) and Research in Motion's (RIMM), and Netflix's (NFLX) fall from grace, for instance, could be attributed to entrepreneurial failure, United States Steel's (X) to managerial failure, while Vineyard Bancorp's and Edge Petroleum's to total failure. Which one is a buy?
Total-It was taken
Over by FDIC in 2009
chapter 11 in
Research in Motion
Yahoo. Over the last ten years the company had a tough luck in recruiting and retaining the right leadership. In the meantime, Yahoo has been growing bigger by acquiring one start-up after another. Between September 1997 and April 25, 2011, Yahoo acquired 64 companies, often paying a hefty premium like the $5.7 billion it paid for Broadcast.com, and $432 million for eGroups. The problem, however, is that most of these companies were in the wrong space, as Yahoo has failed to expand its presence in mobile search and the social media.
Expanding in the wrong direction, Yahoo failed to keep up with Google (GOOG) and Facebook (FB) that have also been growing in the right direction. Worse, Best Buy (BBY) and Yahoo did fail to achieve "economies of scale," the benefits associated with the large size. This can explain why both companies have failed to boost their top and bottom lines, disappointing their stockholders as both stocks have been heading south.
Yet, Yahoo is trading at a low multiple, below that of Google and AOL; it has reasonable operating margins; enjoys a strong industry franchise; and has taken a number of steps to undo the mistakes of the past. It sold its $ 4.3 billion stake in Alibaba and has recruited a new CEO Marissa Mayer with extensive experience in mobile internet as a previous VP at Google, who is moving the company in the right direction: mobile internet, where growth is - In 2011 global mobile internet subscribers per 100 people increased by 87 percent, compared to 8.5 per 100 people of traditional internet. Specifically, Mayer wants to personalize the internet, from search, to content distribution, and ads. Will this strategy be executed effectively? Will it help Yahoo catch up with Google? It is hard to say. However, given the low valuation of the stock, the risk/reward ratio is favorable for the buyers of the stock.
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
*Fye Sep 24, 2013
+Fye Dec 31, 2013
The bottom line: With a strong franchise, sound fundamentals, and a new leader who moves in the right direction, Yahoo has a good chance to rise again.
Disclosure: I am short NFLX.