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Peter Lynch Invests In A Downtrodden Dot-com

Peter Lynch, the former Fidelity Magellan fund manager who famously avoided technology stocks, is buying, of all things, a beaten-down dot-com.

Since January 30, Lynch has acquired more than a million shares of Varsity Group stock, a 6.5% stake, according to a June 4 SEC filing. But before you think that Lynch has bet the mortgage on the company, think again. It closed Friday at 55 cents a share, making Lynch's stake worth about $600,000. That's tip money for Peter Lynch, and it's probably how any investor should approach the stock.

Varsity Group is the new name for VarsityBooks.com, an online textbook seller that went public in February 2000, peaked at about $13 a share its first week, and has gone straight down since. It was delisted from the Nasdaq national market in March and now trades on the over-the-counter market, which means it is illiquid, not the kind of stock you're likely to be able to get into - or out of - quickly.

So what does Lynch see in the stock? His famous dictum, of course, is to buy what you know, so he likely has some familiarity with the company, perhaps through his academic ties. And he's a turnaround investor, so he must think the company can do more than just keep from going out of business. One of his most famous investments was a huge bet on Chrysler in the early 1980s, when the company had been given up for dead. That investment returned billions for Fidelity shareholders over the next several years, and cemented his legend. If he buys a stock, he's likely looking for more than an oversold bounce.

If there's one thing that can be said for Varsity, it's that the company has done a good job conserving its resources. With about $16 million in cash and a cash burn rate that has slowed to a trickle, the company is selling for a little more than half the cash it has on hand. The company has cut staff by 90% to achieve that, and has gone to a seasonal business model based on partnerships, focusing mainly on the back-to-school months when sales are highest. Whether the company can go from surviving to thriving remains to be seen.

For Internet investors, the best response to Lynch's acquisition of VSTY shares should probably be to take his advice: Buy what you know. If there's a Net company whose services you use and like, investigate the company's fundamentals (the part of Lynch's advice that is most often neglected), and if they appear sound, pick up a few shares. But follow Lynch's example and only invest an amount that you can afford to lose.



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