Stock Market in Which Bad Companies Thrive over Good Ones

One of the effects of the current record stock market levels is that companies that are poorly run and post poor results have done as well, if not better, than shares in well-run companies have. This may be an example of the odds that “a rising tide lifts all ships.” However, some ships are more seaworthy than others.

A case in point comes from the share value increases in International Business Machines Corp. (NYSE: IBM) and Hewlett-Packard Co. (NYSE: HPQ). HP shares are higher by 50% this year, compared with 5% for IBM.

The argument most frequently offered for the difference is that IBM was already fully valued and that the shares of HP have been overly battered by bad news. The fallacy of that argument is that the trouble at HP has not gotten better in 2013. If anything, the company is in more trouble. Evidence of this is the increased turmoil over its buyout of Autonomy, the confusion of its board structure and its lack of a way to reverse its fortunes from the death of the PC. One the other hand, growth has slowed at IBM, but its profits and the stability of its operations are remarkable. If a bubble has formed in tech stock prices, HP should be considered as strong evidence.

The case in retail shares is just as compelling, if not more so. Thus far, there is little reason to think that electronics retailer Best Buy Co. Inc. (NYSE: BBY) can be turned around. Same-store sales have stayed in trouble. On the other hand, the company that ruined Best Buy — e-commerce juggernaut Amazon.com Inc. (NASDAQ: AMZN) — posted revenue growth of 22% to $16.1 billion in its most recently reported quarter. It continues to add new products, the most recently rumored a 3D consumer electronics portable. And some analysts believe that Amazon’s enterprise cloud system eventually will be larger than its e-commerce system as measured by sales. But this year Best Buy’s shares are up 120% while Amazon’s are flat. Once again, an argument for the difference is that Best Buy might be turned around and that Amazon has low margins as its spends to expand several of its business. But Best Buy could turn out to be an outright failure, while Amazon is the most admired retail company in the world.

If it takes three examples to make a case, the value of the shares of Zynga Inc. (NASDAQ: ZNGA) and Facebook Inc. (NASDAQ: FB) round out the argument. Zynga’s shares have risen almost 40% this year and Facebook’s are flat. Facebook powerfully made the case that it can continue to grow rapidly and that much of that growth is in mobile. Just last year, the markets were worried that mobile revenue was Facebook’s Achilles heel. In the first quarter, Facebook’s revenue rose almost 40% to $1.5 billion. The social network reported that “mobile advertising revenue represented approximately 30% of advertising revenue for the first quarter of 2013.” Zynga’s revenue fell 30% in its first quarter to $264 million. And its most crucial measure of health fell apart:

Daily active users (DAUs) decreased from 65 million in the first quarter of 2012 to 52 million in the first quarter of 2013, down 21% year-over-year. On a consecutive quarter basis, DAUs were down 8% from 56 million in the fourth quarter of 2012.

Those who believe that Zynga’s share price increase is justified fail to take into account that the company has lost almost all of its promise. Even on a relative basis, the stock trades based on the viability of Zynga, or the odds it might be taken over, both of which are in doubt.

The bull market may press shares of weak companies up more than those of strong ones. The problem is that the weak companies may not have any future at all.