FredE, I am hoping the move up today isn't just a head-fake. Overall, I am still bullish and taking on more long positions on the dips. A close above 126 would certainly bolster confidence that we have seen the worst of the selling/profit-taking.
P.S. I had to correct a statement from John Westergaard yesterday. He had put out an e-mail indicating that BRCM was losing money. To his credit, he corrects his error:
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** WBN Mailbag: A Reader Asks (taken from 7/23/99 WBN e-mail)
Dear John: The statement yesterday about
Broadcom (BRCM 122 Nsdq) is erroneous. The
Company is profitable (earnings were released
yesterday $0.19/share). Please check your facts.
In my opinion, Broadcom will become the next "Intel"
of the bandwidth semi's, and Intel needs to watch
out even though they acquired Level One (competitor
to Broadcom).
Note: The writer may actually know what he's
talking about. He's a "Patent Intelligence Analyst"
with a world class high tech company!!!
Sir, Patent Intelligence Analyst: Hey, wow, leapin'
butterballs. You're right. I blew that one. Kessler
refers to an "implied" p/e and "implied" growth and
I implied that "implied" meant not real. Here's a
recent description of the Company:
"Broadcom Corp. is a developer of highly integrated
silicon solutions that enable broadband digital data
transmissions to the home and within the business
enterprise. BRCM's products enable the high-speed
transmission of data over existing communications
infrastructures. For the three months ended 3/99,
revenues rose from $35.3 million to $96.3 million.
Net income totalled $19.3 million, up from $7.7 million.
Results reflect increased volume shipments of ICs
and high-speed networking."
As for Andy Kessler of "Velocity Capital" who we
characterize as the "Ben Graham of new paradigm
high tech investment theory", here are the
paragraphs from his "New Investing Math" which I
misinterpreted:
"The New Investing Math: Let's do some (easy)
math. If you take a stock's price-to-sales ratio and
divide it by the company's after-tax profit margin
(earnings to sales), you get the price-to-earnings
ratio. If you assume that in today's market, a normal
P/E is one times the growth rate (a big assumption,
but not a bad one), then you can substitute the
growth rate for the P/E. If you know, or can
estimate, any two of the above, you can figure out
what value the market is placing on the third.
"Many Internet companies are losing money, so
margins are negative, but in many cases the losses
are discretionary, so they are nowhere near their
"model earnings." But you can make some
assumptions, based on the business model, of just
what kind of margins the company will eventually
have -- and that is what I believe the market is
doing today.
"Here are some interesting examples: Broadcom
(BRCM:Nasdaq), whose revenue is running at about
$400 million annually, sports a $10 billion market
cap and thus is valued at 25 times sales. Long term,
the company should be able to make 20% after
taxes, so its implied P/E is 125 (25 divided by 0.20)
and therefore its implied growth rate is 125%.
Because the company is currently growing faster
than that, it can be considered reasonably priced."
WESTERGAARD: Ben Graham is widely credited as
the father of modern security analysis
(as contrasted, I suppose, to the "ancient" version).
Mr. Kessler, it strikes us, is also breaking new
ground which is how we come to think of him as the
"Ben Graham of New Investing Math", or some
such!!! In the preceding paragraph, Mr. Kessler is
saying that since the Company is valued at 25x
sales and he believes it can earn 20% after tax, its
appropriate p/e is 125x (25x sales divided by the
20% after tax assumed rate of profit). Now, the
actual estimated p/e is 179x for FYDec99 (i.e.
consensus estimate of $0.68 divided into 122 which
was last night's close).
It seems to me, then, that the stock is a bit stretched
unless it can be expected to grow at 179% or better
for the foreseeable future which is hard to imagine,
particularly earnings this calendar year are
predicted to grow only 42% to a consensus $0.68
versus $0.48 last year. If you accept Kessler's thesis
that a stock should sell at one times the growth rate,
you would have to conclude that it is overpriced by
a factor of 300% which is to say that a proper
valuation would be more like $29 per share than
last night's close at 122.
And keep in mind that this valuation model starts
with the assumption that 25x sales is a reasonable
valuation to begin with. The real Ben Graham
would definitely not have been comfortable with
that. Hmmm€.. Boy, wow, leapin' butterballs -- that
sure is "New Math"!!! Amazing, amazing. |
