Archives For Henry Blodget

An essay in which I consider Whole Foods CEO John Mackey’s response to my question, “if Conscious Capitalism is such a good thing, why aren’t more companies doing it?”

John Mackey, Whole Foods CEO Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey, Whole Foods CEO
Photo Source: Joe M500, Flickr (Creative Commons License)

John Mackey Speech in Raleigh // Conscious Capitalism // Asking Why?

John Mackey stares at the running faucets in the men’s room just moments before his talk. He shakes his head incredulously, muttering to no one in particular, “That’s an awful lot of wasted water.”

The co-CEO of Whole Foods is a man of medium height and possesses a slight build. A tight haircut has tamed the unruly locks of curled hair I’ve seen in so many of his media headshots.  He’s in Raleigh this chilly February morning for a breakfast talk sponsored by our chamber of commerce. Mackey is promoting his new book Conscious Capitalism: Liberating the Heroic Spirit of Business.(1)

He looks around for an air dryer for his wet hands and finding none seems to ponder briefly whether to just slide them across his tan slacks. He opts for a single paper towel instead. Those who want to greet him this morning with a handshake will just have to endure his damp fingers.

Moments later Mackey is giving his spiel before an attentive crowd, a set of remarks unburdened by notes, spilling freely from a mind that has spent much time mulling over the subject. Then he opens the floor for questions. I sneak one in just at the end. It went something like this:

If Conscious Capitalism is such a good thing, why aren’t more companies doing it? Continue Reading…

God bless Henry Blodget and his Business Insider concept. He’s taken pieces from the Huffington Post and Gawker models and brought them to business media, a “journalism” market most would say is far too buttoned down for sensational style reporting.

Well, it turns out business readers are just as big of suckers for tabloid headlines as any other group. I count myself in there, too. I confess to being an avid (perhaps too avid) follower of all Blodget posts on Business Insider. I’m not ashamed of it. The dude is smart and occasionally very insightful. (Following him on Twitter, however, will exhaust you. He can give the best teenage gossip girls a run for their money.) The piece he wrote for New York Magazine about Mark Zuckerberg, The Maturation of the Billionaire Boy-Man, was an impressive specimen of long form journalism. And he went deep on analysis and commentary (here) of Zuckerberg’s letter to investors from Facebook’s S-1 filing, to the benefit of anyone interested in understanding the CEO’s motivations. Finally, he provided a sensible perspective on the whole sham of IPO pops with this article:  Everyone Who Thinks IPO “Pops” Are Good Has Been Brainwashed

But you must take Blodget’s approach with a grain (or two…or three) of salt. You must recognize that his purpose is to entertain as much (or more so) as it is to inform with a journalist’s rigor. Blodget’s job is to give his audience that fix of instant analysis, irrespective of whether the facts queue up in a straight line.

Since I bought shares of Facebook (write up here), I’ve been particularly interested in his coverage there.  It’s been a fun ride. Let’s do a quick re-cap…

The latest was this story from the afternoon (caps are his): GOOD NEWS FOR FACEBOOK: Big Advertiser Says Performance of New Mobile Ads Is Very Promising. A positive news story, of course. But it’s reversing course from his standing trend, as demonstrated by these headlines:

 

Blodget is a one man Shleifer Effect machine! In the course of a month he takes us from enthusiast to depressive and back again, spinning the story each time for maximum attention-grabbing affect. That’s his spiel, and I don’t fault him for it. But I do see his hyperactive approach as a microcosm for what traditional financial media does, just much slower turnaround. Blodget cycles from mania to depression a few times a day, eager for the clicks and agnostic to what might generate them. Traditional financial media works in slower waves, but they’re no less captivated by the prevailing mood and only slightly less eager to portray complex issues as absolutely bad or absolutely good.

 

I don’t believe Facebook requires much by way of introduction. I’m not sure history can show us a more heralded (by the media anyway) public offering fueled by tremendous optimism about the business only to be replaced within days by a string of bad news stories, leading to widespread pessimism about its future, and accompanied by a steep drop.

This is classic Shleifer Effect stuff. But it’s a different kind of business than ones I’m used to evaluating and owning…it’s a far cry from a value situation. This is classic big story growth stock. That’s why I have to disclose this confession: I bought a small piece of this business today.

I’m working on some other projects and don’t have the time to go into much detail right now, but I’ll try to get back to it soon.

Suffice it to say that I see a business with a lot of opportunity for growth by tapping an asset of enormous value, its user base. They make some money now, and I believe the company will find ways to squeeze something viable (nay, thriving) out of those 900 or so million users.

While I remain skittish of social networking businesses (see this post where I mention Facebook in reference to MySpace), I believe there is a durable competitive advantage. In other words, I don’t foresee (despite many people that believe differently) something like Twitter or an upstart making serious inroads to steal Facebook market share and/or force it into a pricing war that reduces its profitability.

I also believe it has a profitable economic model in that its gross margins can (and do) exceed its expense structure (and this despite a lot of expenses expanding for growth) and its earnings can (and do) exceed its requirements for reinvested capital.

But then there’s that pesky problem of price. When measuring it against earnings, it’s high. Very high. Even after the major fall. How am I rationalizing this to myself then, you must ask.

Pessimism. Tremendous, and I believe, unwarranted pessimism that is leading to irrational behavior. Granted, this same pessimism could burgeon further from here. My purchase might lose value. At this point, based on my evaluation of what I see, that would create another buying opportunity. I would take advantage of it.

So, I will no doubt inspire righteous ire by quoting Warren Buffett below in my justification for buying Facebook. But these models are complex and nuanced, so here is one upon which I’m depending more and more…

“The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.

None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: ‘Most men would rather die than think. Many do.’”

Most of the resources I’m paying attention to for news about Facebook come from Henry Blodget’s BusinessInsider.com. Again, I’m not actively trying to attract the outrage of my value investing compatriots, but I find a lot of signal inside the layer upon layer of noise that comes out of Business Insider.

Facebook Stock Is Breaking Down Again (May 30, 2012)

How Morgan Stanley Clients Got Screwed On Facebook — And How We Can Fix The System (May 31, 2012)