Saturday, 4 June 2016

The Greater Fool Theory of investment

Mike Lawrie out to prove the Greater Fool Theory – once again! 

The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems "foolishly" high because one may rationally have the expectation that the item can be resold to a "greater fool". 
(credit to Wikipedia) 

Mike Lawrie has been proving the Greater Fool Theory for the past 3 years or so, in fact ever since CSC stock (pre-CSRA spin-off) went above US$40 which has always been our opinion of its intrinsic value. We thought the CSC stock bubble was about to run out of steam in 2016, because spin-offs had happened, share buybacks had been maximized, one-off mega dividend payments had been made, and high profile but essentially small acquisition had created a lot of buzz, but little revenue. Mr Lawrie has proved us wrong by pulling another rabbit out of the hat, namely the planned merger with HP Enterprise Services, to boost the share price again. 

Since the May 23rd announcement of a planned merger between HP Enterprise (HPE) Services and CSC, HPE has added some US$3 billion or 10% to its market capitalization. CSC’s share price has gone up from US$35 to just over US$50, also adding more than US$3billion to its market capitalization. 

What is behind this sudden US$6 billion increase in market capitalization ? Better business prospects, or finally some signs of real revenue growth? Not at all. No new sales are on the horizon. No new products are to be announced.Only further staff reduction are planned. The jump is based solely on the merger announcement and the expectation that Mike Lawrie will “create” shareholder value by transforming (ie hollowing out) HPE as he has done at CSC. 

History has shown that mergers of established companies which are struggling to keep up with the market rarely live up to expectations. In fact such mergers more often demonstrate that 1+1 = <1 .="" 1="" font="" nbsp="">
We think this is what will happen with CSC and HPE. 

Mike Lawrie and Paul Saleh have shown they are capable of generating share price growth well beyond any growth in rational business prospects and performance. So there may be opportunities to make short-term gains in CSC shares if one gets the timing absolutely right. But we believe there is a much bigger risk of an investor today being the “greater fool” as reality kicks in, which it will sooner or later.

Or in investment analyst speak:-