There are many things I love about investing. Whether it’s finding a great way to safely grow wealth, or finding things to avoid, I love the fact that, behind the headlines, there’s always a story. With investing, we’re dealing with fractional ownership of companies.
So when a company makes an announcement, there isn’t just a change in price or a change in your opinion as to whether something is worth owning or not. There are real decisions being made that touch on a variety of lives.
And, of course, by paying attention to what’s happening in the corporate world, you can see all sorts of crazy things happen. Right now, we’re witnessing some pretty interesting things.
One potentially troublesome trend is how many companies are taking on debt to buy back shares right now. By doing so, they’re increasing their interest rate costs, with no guarantee that it will add long-term value for shareholders. What’s worse, most companies issuing these buybacks are doing so when their prices are at multi-year, if not all-time highs. They’d be better off issuing shares at this point, to raise cash so they can make acquisitions on the inevitable rainy day.
But that pales in comparison to the latest trend: getting in on a hot fad near the peak. Consider the case of Long Island Iced Tea Company, based, as you might expect, out on Long Island in New York. The maker of, again, as the name implies, tea, does fairly well peddling its dirty leaf water. They had a $24 million market cap early last week.
But last week, the company announced a pivot. While it’s still keeping its core business, making a popular leaf-based beverage, they’re going to start investing in cryptocurrency related technologies. They won’t be working on their own technology for it, rather they’ll be investing in the existing blockchain (and blockchain related) tech space. To that end, they’re changing their name to Long Blockchain Corp.
Again, they’re still making tea. But now they also plan to invest in cryptocurrencies. No word yet on beanie babies or pet rocks, but I wouldn’t be surprised if they started investing there if those things showed signs of a huge price movement like cryptocurrencies have this time of year.
When a company makes a major shift from its core business to something else, that’s typically a sign of desperation—if not a crackpot management team. It’s when we get these kind of crackpot moves that bad things happen and the wealth of investors ends up going to money heaven.
I’m not talking about a lateral business move, like a processing chip company expanding from the PC market to the mobile market like Intel (INTC) did a few years back. We’re talking about completely changing the company’s business and what it does.
Let’s step back from the investment part of a business for a second. Most companies have a mission statement and a list of values. That’s what the focus should be on from the highest echelons of management down to the lowliest part-time intern. Working to aspire to those goals and aspirations—like being the best maker of specialty teas in the Long Island area—is a very different set of goals and ideals than investing in technology.
And since “investing” is different than creating or innovating, it seems that the company will become little more than a vehicle for getting into the cryptomania sweeping the markets this year.
This move by the Long Island Iced Tea Company—excuse me, Long Blockchain Corporation (which also makes tea)—is reminiscent of something else that’s happened in the markets before. Back in the 1990’s, any company looking for seed capital could slap a “dotcom” on their name and play off the huge growth of Internet-based companies.
We all know the story. Most of those names went by the wayside, when their business model of churning through money failed after they couldn’t get more money. One of the few survivors dropped the “dotcom” from its name and now just does business as Amazon (AMZN).
This kind of news story is what I call a “canary in the coal mine” indicator. To understand why, simply look at history.
Before tech stocks crashed in 2000, we saw a few major crashes in overseas markets in the late 1990’s—the so-called Paper Tigers. Russia also collapsed briefly as well. It wasn’t just beanie babies.
That’s not the first time we’ve seen this kind of precursor crash in a speculative part of the market. In the 1920’s, a huge land boom in Florida real estate presaged an investment bubble that would culminate in the largest U.S. stock decline (by percentage) of all time.
Given the surge in the crypto currency space in 2017, a major crash there—of at least 70 percent or more—could be a sign that a larger correction in the broader stock market and economy is just 12-24 months out. Stay away from fad names, avoid companies that can’t stick to their core competency like the plague, and stay cautious out there.
Caution doesn’t mean heading for the hills. There are still some great values out there, and the market still has some upside left heading into 2018. But some spots are just getting too greedy. Here’s hoping you avoid the insanity in the coming year. Just don’t drink the bubble tea.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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