The AOL Example

AOL is a great example of why I insist on knowing what companies plan to do with their cash, even if the stock trades cheap. Many value investors have been buying AOL based on the fact that they trade at a little over three times free cash flow once one takes out the $7.50 in cash sitting on the balance sheet.

The stock would be a no brainer if it were not for the fact that the CEO is spending the cash like a drunken sailor. The multiple of free cash would be even lower if the company were not wasting money on things such as a fancy headquarters in Downtown Manhattan. The company has paid high prices for Tech Crunch and The Huffington Post even though nobody has figured out how to make money off of content on the Internet.

The AOL example is the reason that I not only insist that a stock trades cheaply but also that I know what management plans to do with the money. Making money and burning it is the same as not making the money at all.

1 comment:

Anonymous said...

40% of aol revenues come from dial up.