The Growth Factor

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by John Barr

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John Barr
Chris Retzler   



Vol. 10 - November 15, 2013

Are We in a Bubble?  We Say No, But Be Careful Out There

Bubble:  When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble bursts. - Financial Times Lexicon


This morning I had the opportunity to appear on CNBC's Squawk Box and was asked, "Are we in a tech bubble?"  My answer was that there are pockets of exuberance, but we are nowhere near 1999. 


Andrew Ross Sorkin and Joe Kiernan asked what we think about Amazon (AMZN), LinkedIn (LNKD), Twitter (TWTR), Snapchat (private), and Facebook (FB).  My answer was, "No, those don't make sense to us."  Those companies are valued at over 10x enterprise value to revenues and are not profitable.  These "story stocks" are equities that traders love to hear about.  We believe a few of these new story stocks may develop into great, profitable companies, but at these valuations there is little room for error. I mentioned Google's (GOOG) IPO at $27 billion and Google's acquisition of YouTube for $1.7 billion as two examples of valuations that seemed to make little sense at the time, yet, they turned into great investments.  


1999 - now that was a tech bubble.  In 1999, EVERYONE was talking about and investing in tech stocks. The IPO class of 1999 was very different than the class of 2013.  Today's IPO companies are larger, more profitable, older and valued at a discount to the class of 1999.   Professor Jay Ritter of the University of Florida has a great website with IPO data.  His work was used in a recent Wall Street Journal article: "Silicon Valley: Feel the Froth - Tech Valuations Stir Memories of 1999, But There Are Some Differences." 



As we've written for the last several years, we believe the Federal Reserve and other monetary authorities will remain accommodative for the foreseeable future and that asset prices, including equities, will benefit. 


Yesterday, Janet Yellen said that she doesn't see asset bubbles.  She also said economic data are "...reflecting a labor market and economy performing far short of their potential."  Regardless of what anyone else thinks, the nominee to head the Federal Reserve does not see an asset bubble.


We generally invest in companies that generate earnings and cash flow, or where we can see a clear path to such.  On CNBC, I mentioned WageWorks (WAGE) and Financial Engines (FNGN) as two examples of companies that we own that are profitable, trade at single-digit multiples to revenues, and are in large, growing markets.  We bought them several years ago when they were relatively undiscovered. Last quarter, we added YuMe (YUME), Clean Harbors (CLH) and a handful of other stocks that fit our criteria. We see clear opportunity in the market for these types of stocks, but we do not see a clear opportunity in the story stocks.   


As always, we advocate careful fundamental research of stocks that our readers are considering for investment.   Are we in a bubble?  We say no, but we also say be careful out there and know what you own.  

*The Needham Funds aggregate ownership as a percentage of net assets in the stated securities as of 9/30/13: FNGN 2.47%; WAGE 1.31%; CLH 0.35%; and YUME 0.27%.
The information presented in this commentary is not intended as personalized investment advice and does not constitute a recommendation to buy or sell a particular security or other investments.
This message is not an offer of the Needham Growth Fund, the Needham Aggressive Growth Fund or the Needham Small Cap Growth Fund. Shares are sold only through the currently effective prospectus. Please read the prospectus and consider the investment objectives, risks, and charges and expenses of the Fund carefully before you invest. The prospectus contains this and other information about the Fund.


Investment returns and principal value will fluctuate, and when redeemed, shares may be worth more or less than their original cost. Shares held 60 days or less are subject to a short-term redemption fee of 2%. Past performance does not guarantee future results and current performance may be higher or lower than these results.  Current month-end performance and a copy of the prospectus is available at or by contacting the Fund's transfer agent, U.S. Bancorp Fund Services, LLC at 1-800-625-7071.


Funds holding smaller capitalized companies are subject to greater price fluctuation than those of larger companies. Also, the Fund's use of short sales, options, futures strategies and leverage may result in significant capital loss. Total return figures include reinvestment of all dividends and capital gains. Needham & Company, LLC, member FINRA/ SIPC, is the distributor of The Needham Funds, Inc.