Picasso Premium's and Investing
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With the sale of Maple Leaf Sports and Entertainment to the two biggest media companies in Canada, Rogers Communications (NYSE: RCI) and Bell Canada (NYSE: BCE) in December for $1.3 billion they now each have a major stake in the Toronto Maple Leafs as well as the Vancouver Canucks (Rogers) and the Montreal Canadiens (Bell). Their media oligopoly in Canada now extends to the most valuable brand in the country. This marriage of sports and media is nothing new, even if one company owns both potential participants in a future Stanley Cup Finals. Madison Square Garden has owned the New York Rangers and Knicks forever.
For the media conglomerates facing falling ratings and advertising revenues their best chance to monetize television is with the only type of programming that requires timely viewership, i.e. live sporting events, which is why these franchises trade at such a high premium along with things like the World Cup and the Olympics.
How this deal will change the television viewing structure in Canada is unclear, Leafs TV and Pay-per-view Canucks games give us an idea. That said, as an investment, the Leafs are a pretty good value (even if the product on the ice certainly is not) as their net margins are a whopping 42.3% on league-leading revenues of $193 million.
The situation down the QEW in Buffalo is completely opposite. When new Sabres owner Terry Pegula was asked if he would require the team to make money, a pre-requisite of former ownership, Pegula replied, “If I wanted to make money, I’d go drill another gas well.” The Sabres lost $5.6 on revenues of $87 million in 2011, 23rd in the league.
Malcolm Gladwell called the subjective value of something beautiful the ‘Picasso Value’ which he coined after reading a paper which placed that premium at 28%. And the most recent example of this is Munch’s ‘The Scream’ selling at auction for $120 million. Companies like Sotheby’s (NYSE: BID) make their living defining the psychic value of collectibles and their business is tied completely to the momentum of the market. Sotheby’s trades at a multiple to the wealth effect of a rising and falling stock market as evidenced by its very high beta of 2.4 and year-to-date alpha of 3. Newly-minted millionaires deploy their wealth in non-economic assets as their pent-up demand for the finer things can finally be fulfilled and vice versa. For Terry Pegula the Sabres are his Picasso.
Similarly, I love my MacBook. Much is made about Apple’s (NASDAQ: AAPL) brand and the aesthetics of the various iGagdets engendering uncommon loyalty in the market. I think my Samsung Android phone is a brilliant piece of functionality but my Mac makes me smile. A strict comparison of specs between PC’s and Macs definitely yields a Picasso premium that techies do not understand placed on the Mac. The same thing applies for iPads and Android tablets. I’d wager if one did a detailed study of Apple’s pricing that that 28% figure would look pretty accurate.
In Southeast Asia the demand for Apple products is so high that an iPhone 4s sells for 36% higher in China than it does in the U.S. The numbers aren’t quite as good in Malaysia (23%) and Singapore (31%), but the premium is still there. That pricing premium is built by Apple in a variety of ways but their investment in design and the marketing of it has produced excellent returns.
The Social Capital Valuation Model
People who invest ideologically are doing so with a Picasso premium. Think green technologies like solar and wind power. There’s a reason the Toyota Prius is called the “Pious” by the way. They are discounting the present value of their cash versus the potential return on investment with an ideological rationalization. It’s no different than the man who bought “The Scream” for $120 million or the fan who buys his favorite sports team.
The problem with this is, of course, reality. And it is the essence of the credit-fueled boom/bust cycle which helps create these inflated valuations. In Vietnam, we have a property market in Ho Chi Minh City and Hanoi completely locked up because the owners believe they have such psychic or social value and try to justify them using social capital arguments. These same people have sunk millions into football franchises trying to create branding for their company, connecting them to the community, as opposed to doing it the old fashioned way, by providing real value.
These realities are being faced by some of the major companies, like HAGL (HoSE: HAG) who is under-cutting their competition by a significant margin for their unsold villas and apartments but the unwinding has been painfully slow.
In a thinly-capitalized and restricted market like Vietnam, this has a powerful effect of keeping stocks valued far higher than their fundamentals allow. As our capital markets are liberalized, a step taken very recently by China, I expect to see the market begin to grind these valuations down. The government intends for the equity markets to rise to 50% of GDP in market cap from its current level of ~25%. Until more companies and banks admit defeat and allow the market to clear, that goal will remain unfilled as investors refuse to pay a premium for junk, unlike Leafs season ticket holders.
Because of foreign ownership limitations and its own market cap minimums, the Market Vectors Vietnam Index ETF (NYSEMKT: VNM) is invested in companies whose fundamentals do not justify their price but the ETF maintains positions in them precisely because they do not have access to the stocks that do.
All of this is putting a bid underneath some stocks that do not deserve it while starving other companies of the capital that they should be attracting. Companies that cannot cross the Apple threshold in consumers’ minds will eventually be body-checked back to reality.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple, Rogers Communications (USA), and Sotheby's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.