Everyone Into the Dead Pool

A few weeks ago, stock trader and entrepreneur James Cramer wrote in RealMoney that many e-tailers are now worth more dead than they are alive.

Cramer explained that the value of many e-tailers’ stock equity was lower than the value of the cash they had in the bank. The value investors were placing in the operating businesses was less than zero.

Some of these outfits are relatively big names. E-Stamp had $91.3 million in cash in the bank at the end of its last fiscal quarter. Its total equity was valued at $35 million recently. Rival Stamps.com had $368 million in the bank at quarter’s end but was worth just $174 million this week.

Other well-known companies in the dead pool are Musicmaker, which is now worth just $23 million; Autobytel, now worth $119 million; and BigStar Entertainment, now worth just $6 million.

The fate of these companies, in fact of all e-tailers, should put to rest the old saw that markets are rational. A year ago, Autobytel was worth nearly a half-billion dollars, and E-Stamp was worth $1.75 billion. Sure they’ve lost money in the meantime, even missed a few quarterly earnings estimates, but either the market was crazy then, or it’s crazy now. My guess is it’s crazy always.

The fact is that market psychology is as fickle as fashion. You can use a golden glow to acquire assets that do turn a profit, or you can ride that raft down the river to the sea. It’s your choice.

What will happen next to these companies? Here’s where things get interesting and nasty because there are sharks in the sea. A raider could buy a company like this for the cash, firing everyone and selling everything for a short-term profit. Worse, the Nasdaq could “de-list” the stock, making it impossible to trade that’s the threat now hanging over E-Stamp, BigStar, and Pets.com, worth $29 million with $70 million in cash on hand.

Smart people can fall into the dead pool as easily as dummies. A CMGI venture fund is a big holder of MotherNature ($1.96 per share in cash on hand, stock worth 37 cents per share). Benchmark Capital is a big holder of PlanetRX ($1.47 per share in cash on hand, stock worth 50 cents per share). My guess is that if there are any outfits worth saving here, smart institutions will find them, buy them, and hold them until markets change again (as they will).

What clue should you take from all this? You can either build a business or build for the market. If you’re doing the former, stay private until you know you can turn $1 into $1.05 regularly. If you’re into the latter, bring a parachute, and when everyone starts patting you on the back, prepare to jump.