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Monday, July 09, 2007

Getty's "stay the course" stock price

I was sent a link to this blog posting, where John Harrington gives his reasons why he's shorting GYI, Getty's symbol on the New York Stock Exchange. In other words, he's going to make money by selling shares he doesn't yet own now, wait for the price to drop, and then buy those shares back later, thereby making a profit.

Good idea, but he's too late, and is doing so for the wrong reasons. I had actually written my analysis of Getty back in January of this year, when I revealed I had shorted GYI in the mid-80s and covered the position in the mid-40s, thereby doubling my money. See this posting (towards the end).

The difference between my analysis and Harrington's is that what I knew of the industry and of Getty's management was not yet reflected in the share price. Harrington's analysis, on the other hand, is not only old news, but it's already been reflected in the price.

While Harrington's post may be an interesting tutorial for the photographer to understand how Getty's price got to where it is now, it is decidedly a poor tool for guessing where it'll go next. To read his advice now is like the stranger who just walked into town to inform the townsfolk that the boy crying wolf is "probably lying," even though the townsfolk have already known it for quite some time and had already stopped going to rescue him.

But, I'm not here just to harp on Harrington. (I don't even know him.) Indeed, predicting when a stock price can move is a tricky business, and anyone pretending to have a crystal ball should be regarded with extreme skepticism. (In fact 75% of professional money managers under-perform the major stock index funds. hence, my free professional investment advice: buy iShares in the top 5 indexes, and stop thinking about the stock market for a long time.))

But the reason why I think Getty's stock price is worth mentioning again (six months after I mentioned it last) is not so much to predict where things are going, but to talk about what we might expect to see from the broader industry as a byproduct of the stock's eventual movement. That is, because they are the largest planet in our little solar system, we can gauge how the little asteroids move if the one with the largest gravity moves.

For the moment, FYI is in a holding pattern: the current PE of 22-ish, and a forward-looking PE(2008) of 16 suggests that investors have already discounted all the bad news that analysts have projected. It's "book value" (the value of its assets, such as cash, real estate, and other hard assets) is literally half of its current stock price, further supporting the notion that today's price is close to the bottom. By comparison to many other stocks with their PE and book value, the likelihood of further erosion is less than a spike upwards. In other words, the stock can't go down much further before investors will just start taking the computers out of the offices.

As for short sales, 6% of outstanding shares already short right now, which suggests that people are already looking to cover those short positions (buy the shares back) at any glimmer of opportunity. To that, note that any sudden upward spike of Getty shares is probably due to people buying back their short positions rather than buying into the stock because they think it's a good value. If anything, the upside is more likely because it's not a dead carcass yet, and those with real money in the game don't really want to see the animal eaten by vultures. Yet. So, short selling Getty further into this would only be warranted if some unknown catastrophic event were to happen, such as a stock option scandal, or a scandal of any sort.

True, if the management continues to "stay the course" in the face of a market and industry that is no longer playing by the rules of the pre-internet era (where Getty's mind is), then yes, the stock could erode a little more. Yet, there are forces pulling the other way as well, short-covering notwithstanding. The most important of which is the news several months ago that a big chunk of stock was purchased by some investors who said that it was their objective to "shuffle out the management." It was enough to give the stock a boost from the mid 40s to the low 50s. That kind of premium means that someone that 'real investors' respect is going to effect some sort of change. Just like a country that's unhappy with its executive branch for "staying the course" may vote them out, the same is expected to happen (in one form or another) of Getty's management. (Or, that's the word on the street, and the current expectation.)

The other potential reversal of fortunes could come from Getty's (and Corbis') recent announcements of a serious push into other business models besides photography--namely, licensing of all sorts of media, such as music. I actually consider this to be a good move from a business perspective. But again, the fly in the ointment whether the current management team can execute on the plan very effectively given their previous track record (which is reflective of a poor mindset).

Again, drawing the comparison to our country's administration, how much can one trust a management team with a steadfast refusal to "change course" if they were to suddenly announce that they are going to try something new. "New" is great and needed, but it also has to come with "new management" with a better track record and faith by the shareholders (and electorate). In fact, I'd rather the new team be the ones that tell me about a new plan--that way, it won't be tainted before it can be tried. (Getty or our own administration.)

True to form, Corbis actually replaced their CEO with someone with the task of doing just this (expanding into other media licensing), and we didn't know about it till after the fact. Who knows--they may have a good chance at a "successful" IPO after all.

I've written extensively over the course of time about each of Getty's individual errs, and have given my prescription for a new, better direction. You can read all about them in my blog archives, but the point is, my prescriptions for Getty were more in the form of inevitabilities for the stock photo industry anyway. Things like a migration (and fusion) of the social-networking model with the microstock model; the inevitable rise in microstock prices from $1 to $10 (or, $9.99) for the basic buy-in; and the general embrace of the consumer as a target buyer, as well as supplier, of common images.

Once Getty has new management, then it'll be the day that someone will adopt a new vision for how this can be accomplished, which will have a trickle-down effect on all the other players in this industry. My sense is that Getty's stock price is the barometer that will offer the first sign of changes in the weather...

That, or if Corbis manages an IPO that earns a respectable multiple. (Note: just going public isn't enough--it has to do really well for the company to be regarded as a bellweather for future forecasting.)

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