We’re So Smart It’s Terrifying

Awful

Awful

 

Two years ago we wrote a post on the foolishness of getting caught up in topical and exciting initial public offerings. And this was back when Facebook was still privately held.

For the unsophisticated among you, yet another piece of knowledge that’s so obvious it’s easy to miss:

Your bank account understands only numbers. It doesn’t care about social buzz, popularity, trendiness, your Pinterest board, what Jay-Z has to say about diversification, or what your friends are doing (especially what your friends are doing.) That bank account is antiseptic and uninterested (disinterested, really) in your workaday concerns. It only sits there. It doesn’t even necessarily want to grow. Great if it does grow, but getting it to do so is your problem. Your financial balances don’t want to grow because they don’t want to do anything. They have no capacity for desire, nor any other emotion. And with respect to money, neither should you.

Seriously, what is the point of snapping up Zynga stock the moment it goes on sale? For a lot of people, it goes no deeper than “Here’s this product/service that I use, and now shares of the company that makes it are available for purchase. Therefore, I can take both figurative and literal ownership of it, and derive validation that way.” If it’s important for you to self-identify as an avant-garde shareholder, in tune with the New Economy, Business 2.0, stop reading. You’re going to hurt yourself.

Folks, we’re in this for one thing only. MONEY. It’s all that matters, at least for our purposes. Otherwise go find a personal fulfillment blog or one of those unreadable debt blogs instead. Here’s one to get you started.

Back to the summer of 2011. It was a simpler time. Prince William and the incipient Duchess of Cambridge had just moved out of their parents’ places and in together. South Sudan didn’t yet exist as an independent nation. Amy Winehouse still had a pulse. And Crumbs Bakery went public.

Our parents’ generation had little trouble discerning between Things of Importance (work, responsibility, knowing how to fix a carburetor) and Trivialities (self-expression, keeping your friends apprised of your hour-to-hour activities.) Cupcakes were on the latter list, and near the bottom.

We maintained that a business predicated on the creation and delivery of cupcakes was something better suited for prepubescent neighborhood girls than for a NASDAQ-listed company. Or for a NASDAQ Capital Market-listed company. (That’s the real NASDAQ’s developmentally delayed cousin.)

Crumbs went in the toilet, and quickly. It took 2 months to lose half its value, which it never regained. In fact, it took another 6 months to lose half its value again. It’s since lost yet another half of its value and then some, making Crumbs stock a Zeno’s Tortoise of sorts.

Why was this an awful investment? Well, we already told you way back then, but if you didn’t click the link:

  • The company expanded way too quickly. 
  • It doesn’t take a tenured college professor to determine that cupcake demand is pretty elastic. The lower your income falls, which it likely has if you’ve lived in the United States since Crumbs’ inception, the smaller the ratio of it you’re going to spend on sugary treats.
  • Barriers to entry? Any idiot with a pan and some non-stick spray can bake muffins.
  • You’re probably fat. Eat some celery instead.

Our recommendation instead was to invest in Crumbs’ antithesis. A company beyond uncool. There isn’t even any room for this company on the hipness continuum. You can’t savor their products, or even touch most of them. McKesson distributes wholesale drugs and medical supplies. And it sells clinical software to hospitals, too. Is that getting you excited? If not you, then how about the lifestyle editor at The New York Times Magazine? Did Sex & The City ever do an episode about workflow management for osteopaths?

McKesson is up 38% in the last year and a half, or about 12,800 basis points more than Crumbs. If we told you one of these companies would be bankrupt in a year – McKesson, which pulls in $122 billion annually; or Crumbs and its $14 million market capitalization, with operating expenses that eat up its gross profit and then some every quarter – which would you pick?

People like to think they want more money than they currently have. But in practice, lots don’t. The ones who dabble in investing, more properly dubbed speculating in their cases, mostly have motivations other than that of increasing their net worth. We aren’t completely sure what those motivations are, and we don’t care. The road to building wealth doesn’t have to be glamorous to be effective, and probably shouldn’t. If everyone’s talking about an investment, it doesn’t mean it’s worth investing in. It doesn’t necessarily mean that it’s not worth investing in, either, but maybe you should use measuring sticks other than public natter.

A cupcake IPO? Seriously now?

 

 

Perfect for those weekends in Vegas with nothing to do

Yeah, this cupcake’s not feeling well and won’t be able to make it in today

 

NOTE: this post originally ran, in a slightly less libelous version, on Adaptu.

Intermediate readers, skip the next paragraph.

IPO = initial public offering. Refers to a formerly privately owned company finally making its shares available to whomever wants to buy them. The company now trades on a stock exchange and its financial statements are now public record. The biggest American IPO in history (not counting companies that went into receivership, became wards of the taxpayers and reemerged) was that of VISA in 2008. The heretofore private company opened on the New York Stock Exchange at $64.35/share. It peaked at $96.59 last April, and sits around 75 now.

On second thought, skip this paragraph too.

Somewhat evidently, every company has to do its IPO at some point. An IPO is obviously a big deal: and for many companies’ principals, who own options to buy the stock at a certain discounted price and will profit the second the company goes public, an IPO is as good as it’s ever going to get.

A few weeks ago, boutique cupcake retailer Crumbs Bake Shop went public. “Boutique”, by the way, is a French word meaning “small, but with cachet among urbanites and various other pretentious fools.”

Crumbs has 24 retail stores in the New York tri-state area, 6 in Los Angeles, 3 in D.C. and its environs, and 1 in Chicago with 3 more New York-area stores in the works. In New York and Los Angeles, they deliver to your door. The company is a public relations phenomenon, renowned as the creator of the Baba Booey cupcake (peanut butter frosting, chocolate cream cheese frosting, peanut butter chips) and the Artie Lange cupcake (chocolate cream cheese frosting, Vicodin filling, served in an edible wrapper doused in lysergic acid diethylamide).

Still, a company that can get Howard Stern’s attention is not necessarily a company worth investing in. If you’re old enough to remember Outpost.com, you know what we mean. Unlike VISA, Crumbs isn’t an internationally recognized name with decades of results behind it. Nor is it Microsoft (IPO 1986), nor Google (2004), with a palpable potential for growth and a revolutionary and established product line. Use whatever corporate buzzword you want with cupcakes, but “game-changer” doesn’t really fit.

Okay, what about its company history?
It barely has one. Crumbs was founded in 2003 by a husband and wife team – she’s a lawyer, he’s…well, here’s the relevant sentence from his official bio:

Jason started Famous Fixins, a manufacturer of celebrity licensed products, with such products as Britney Spears bubble-gum and NSYNC lip balm as well as products with high profile names such as Derek Jeter, Mike Piazza and Sammy Sosa.

We could go for a cool, refreshing, sturdy, gluten-free, Mac-compatible fair trade Sammy Sosa product right now. How about you?

Does it have goodwill – the accounting term that refers to intangible value beyond its assets?
Nothing you can quantify. To we middle Americans, Crumbs doesn’t even register. We’d even heard repeatedly about their novelty cupcakes, but couldn’t tell you the company’s name. The one New York cupcakery we did know the name of is Magnolia Bakery, and only because of that one Saturday Night Live bit.

Does the company have a competitive advantage that no one can replicate?
That depends. Do you have a kitchen and a couple of mixing bowls?

Crumbs’ IPO hit the ground with a valuation that now leaves it around $58 million. Granted, ExxonMobil has more than that in its petty cash envelope, but $58 million is a decent amount for a company that until this point has had only 2 visible owners.

The markup on a cupcake is enormous. Crumbs retails its cupcakes for $4.50. That’s each, not for a 4-pack. With that much profit baked into every bite, the company has designs on opening 300 more stores.

Making cupcakes can be profitable, maybe even in the long term. But a $58 million business? Here are a couple of schools of investing thought, each encapsulated in a single sentence:

You have to look at a company’s income, shareholders’ equity, how much debt it’s carrying and how much cash flows through it before you invest in it.
Control Your Cash

 

We go to Starbucks every day, so I buy Starbucks stock.
Barbra Streisand

It’s safe to say that Crumbs is counting on people who subscribe to the latter belief to help it grow into maturity.

But even Starbucks sells more than mere coffee. At one point the company went so far as to publicly consider itself the primary place to exist when you’re neither at work nor at home. The Wi-Fi and the music attest to that, and it appears to be working. Besides, when Starbucks went public it was far more entrenched than Crumbs is today.

It’s not that you can’t sell a capricious, semi-serious item in a recession – Altria and Molson Coors are both doing fine, and it’s slightly less harmful for society that overextended people stuff their faces with Baba Booey cupcakes rather than cigarettes or alcohol. But it’s hard. Let the lawyer and the manufacturer of celebrity licensed products build the business themselves.

We give the Crumbs founders our wishes for success. What we’re not giving them is our money.

McKesson has a $21 billion market cap and is trading at close to a 12-year peak. They sell payroll software to doctors, and prepare health claim management forms. You’ve never heard of them, which means they’re really underground. If that’s not hip and trendy, we don’t know what is.

**This article is featured in the Carnival of Personal Finance #314**