Mike, I like your list, as a point of departure.
One point of philosophy that I feel we should articulate and then deploy in some of our stock selection, is to pay up for the Gorilla in an area.
Category killer is another street term meaning that one company is so far ahead and executing so well that they are the dominant defining company of the sector.
JDSU is the leader in the fiberoptic area it seems and if we feel this is the case I would overweight them. and if it came to choosing only 1 stock, I would opt for it even though it may have a higher valuation placed on it.
Historically it seems to work out that one should pay up for the market leader. Rather than trying to play catch up by buying another stock in the same sector that has lower multiples on it. (and you Know that for someone who can be as value oriented as I am, it's hard for me to say this.-ng-)
The only thing that brings me to utter this type of thinking is that it is usually the case that a leader or gorilla in a sector that is executing the best continues to do so going forward.
CSCO has been an excellent example of that in the networking area. CSCO in the past 10 years has usually had a higher PE multiple and higher price to sales, and has been more richly valued relative to it's peers, such as COMS, or NN etc.
However it has been the right move to pay up for CSCO.
Looking over the last 5 years Dell has had a higher multiple than the other box makers such as CPQ and GTW, but again going for the Mercedes Priced stock has yielded superior performance.
looking at a nontech sector, XOM has been the leanest best run integrated Oil company in the world, with the best financial ratio's.
XOM has had debt to equity ratio of .21 compared to the industry's .47. XOM has had a higher PE ratio historically, a higher price to book, but has had a better net profit margin, a superior return on equity, A superior return on invested capital.
And Most importantly has been the Best performing stock in terms of price appreciation over the past 5 years. These types of comparisons hold true over longer periods as well.
XOM Numbers vs. Industry
PROFITABILITY RATIOS.... Company .....Industry %
Net Profit Margin .....4.99%........ 4.00%
Return on Equity ......12.00% .......10.10%
Return on Invested Capital 10.90%...... 7.80%
VALUATION RATIOS
P/E Ratio .........40.79 .....52.31
Price/Book Ratio.... 4.73.... 3.68
Price/Cash Flow Ratio 19.38.... 12.38
FINANCIAL STRENGTH RATIOS
Current Ratio ....... 0.84..... 0.90
Leverage Ratio...... 2.15...... 2.31
Total Debt/Equity.... 0.21..... 0.47
QCOM has been the leader in the wireless CDMA design.
QCOM pioneered code-division multiple access (CDMA) technology, used in cell phones, wireless telecom equipment, and satellite ground stations. QUALCOMM is the US's #2 supplier of digital cell phones, but is selling that business to Japan's Kyocera. It will continue to make CDMA chipsets and to license that technology to others, and will focus instead on High Data Rate, a new wireless data technology
Not much commentary on QCOM is necessary, when we know that it has gone up 27 fold this past year. from a close of 7.265 on 1-25-99 to 200 on 1-3-2000. at 140 QCOM is still up over 20 fold.
CMRC and ARBA, appear to be 2 of the best positioned B2B E-Commerce companies, and CMRC is on the early fast track to developing Gorilla, or Category Killer status.
So a key theme that we should try to utilize when we can is to not shy away from a richly valued stock if it is the market leader, especially when we are putting it into the longer term portion of the portfolio.
Comments, Questions, Concerns..?? -g-
John |
