products for the management of Internet traffic, went public on July 28,- At the time of the offering, the firm had never sold a dollar’s worth
of goods and had $72 million in operating losses. Nevertheless, Corvis
had a market value of $28.7 billion at the end of the first trading day, a
capitalization that would place it in the top 100 most valuable firms in
the United States.
It is sobering to contrast Corvis Corporation with Cisco Systems,
which went public 10 years earlier. By the time of its IPO in February
1990, Cisco had already been a profitable company, earning healthy
profits of $13.9 million on annual sales of $69.7 million. The market
value of Cisco’s IPO at the end of the first trading day was $287 million,
exactly one-hundredth of the market value of Corvis Corporation,
which at the time had not yet had either sales or profits. Cisco would be
classified as a “growth” company in 1990 with a higher-than-average
P-E ratio, but Corvis was a “hypergrowth” company.
Corvis Corporation, with an IPO price of $360 (split adjusted) on
July 28, 2000, opened trading at $720 and later rose to $1,147 in early Au-
gust. Subsequently the stock fell to $3.46 in April 2005.
THE NATURE OF GROWTH AND VALUE STOCKS
When choosing “growth” and “value” stocks, investors should keep in
mind that these designations are not inherent in the product the firm
produces or the industry that the firm is in. The designations depend
solely on the market value relative to some fundamental measure of en-
terprise value, such as earnings or dividends.
Therefore, a firm in the technology sector, which is considered to be
an industry with high growth prospects, could actually be classified as a
value stock if it is out of favor with investors and sells for a low price rel-
ative to fundamentals. Alternatively, a promising auto manufacturer in a
mature industry with limited growth potential could be classified a
growth stock if its stock is in favor with investors and priced high rela-
tive to fundamentals. In fact, over time many firms and even industries
are alternately characterized as “value” or “growth” as their market
price fluctuates.EXPLANATIONS OF SIZE AND VALUATION EFFECTS
There have been many attempts to explain the size and valuation factors
in the data. Fama and French had hypothesized that there might be un-
usual financial stresses in value stocks that only appear during periodsCHAPTER 9 Outperforming the Market 157