TO ALL WIND INVESTORS (LONG AND SHORT) AND WIND EMPLOYEES
I think all of us have been wondering at the extent of price erosion since WIND reached its all-time high early this year. Price movement this extreme demands some kind of explanation. The recent DOW correction of about 10% and the somewhat deeper NASDAQ correction, are not nearly sufficient to explain WIND's recent price movement. The erratic price belies the apparent strength of embedded systems sector and the myriad opportunities for WIND that are happening today, with new exciting opportunities occurring almost daily. The implications for the market leader in embedded systems stagger the imagination. Why has the stock fallen off so sharply in the correction, and when will the correction be over?
To understand why the stock has lost its direction, you must begin by re-reading the last sentence in the previous paragraph. The word "correction" is a misnomer, and only with the proper market description will you begin to understand why the stock lately has defied basic economics, proving absolutely that market inefficiencies do extent - at least with small stocks.
The first hint that the word "correction" is misplaced comes from our major new WIND investor, Gary Pilgrim, representing the Pilgrim-Baxter family of funds. He was quoted the other day, before the most recent sell-off, that the current market is the most brutal his five-star rated funds have experienced - ever. As the overall manager of $9 billion, you must assume Gary chooses his words carefully. His funds experienced the catastrophic, history-setting crashes of October 1987. How can this correction even compare to that epic event? I corroborated Gary's view by discussing the recent performance of small tech stocks with a friend who is a partner in one of the private aggressive hedge funds that formed with much fanfare last year. I found myself trying to comfort and support my friend, while gaining some relief from the fact that windows don't open in modern skyscrapers.
I decided to delve deeper into what is going on with small high-tech stocks. I took as my study sample the Hambrecht and Quist (H&Q) universe of non-health-related software stocks, excluding the large-cap MSFT and ORCL. As a group of 93 stocks, they may not always be the best, but they certainly contain many market leaders, and many companies that interest me. I have no idea if these companies out-performed or under-performed software companies in general, but I do think their overall performance is indicative of the financial market in which WIND competes.
Here is what I found out:
SOFTWARE CATEGORY, Average and Median Percentage Drops from 52-Week High
Database & Data Warehousing, 71%, 74%
Development Tools, 65%, 60%
PC Software, 57%, 66%
Enterprise Applications, 54%, 52%
System Software & Services, 39%, 35%
Technical Software, 59%, 60%
Mechanical Computer Aided Design, 38%, 32%
Embedded Systems Development Tools, 65%, 72%
Manufacturing & Facilities Optimization, 61%, 61%
Video Audio Editing, 64%, 64%
Digital Media, 60%, 64%
TOTAL, 60%, 58%
Every category of software company has been trounced over the last year. Now, we know that some of these companies failed to execute up to expectation, but by no means have they all performed poorly. As one example, WIND has executed flawlessly over the last year. Also, some of the companies ran into problems over a year ago, so the percentage they are off their 52-week high understates how much they have been trounced. For example, SNIC shows in the sample as being off 52% when, in fact, anyone following the stock knows it is really off much more than that, because their troubles started earlier than one year ago.
Fellow investors, this is not a correction. It is not even a bear market. This kind of carnage can only be described as an extreme market crash. The financial market for software companies has crashed. This must be what Gary Pilgrim knows and what my friend in Boston is experiencing the hard way. 80% of all software company stocks in the H&Q universe are down roughly 40% or more! You are participating in an historical event that will be recalled and referenced henceforth. (So do not embarrass yourself.)
By the way, this explains all of WIND's crazy price movements over the last few months. Market crashes unleash ferocious forces that cause erratic price movement seemingly unrelated to underlying economics and reason. Crashes cause massive fund redemptions, which in turn cause panic selling, which attract day-traders and bottom-fishers, which etc. etc. etc. The short-term consequences of these forces are unpredictable, certainly using fundamental analysis. I leave it to Stephen to inform us how useful TA can be during a crash.
Now that we have properly labeled the financial market as a severe crash, what should the prudent investor do? Fortunately the answer is very, very simple. Buy all the stock you can afford, starting now. If you worry about finding the bottom, spread it out and buy a fixed amount every day or week until your money runs out. The market is never correct about a crash - never. The economic justification of WIND's stock value is correct. The stock is a steal at its recent high water mark; it is insane at current prices - thanks to an insane market. Under no circumstance begin to doubt the economic soundness of WIND, or probably any other high-tech stocks you currently own. It is virtually certain that the price is down because of the market, not the company. View this market as a once-in-a-lifetime opportunity to buy a great growth company cheap.
How long will this crash continue? How deep will it get? You know by now that I have no special insight into these questions, and only think about them out of curiosity. It will end; there will be a total recovery. I just don't know when. However, if I were to guess, here is what I think might be plausible timing:
The timing is exquisite for the upcoming H&Q Technology Show at the end of this month to trigger a gigantic reversal. Imagine 3000 money managers, representing $3 trillion of invested capital, being presented first hand with concrete evidence that many, if not most, of the companies in the software universe are extremely undervalued. These guys have cellular phones with them in the presentation rooms. Last year GWRX went up 7 points within one hour after giving an impressive presentation - visible on real-time quote computer screens set up at the conference. What do you think Ron Abelmann is going to say at the show on Tuesday morning at 8:00am on the 29th of April? If all he did was provide the money managers present with Intel's production schedule for I2O chips, the stock would jump 10 points. (Intel has a history of providing analysts projections of chip production, so one does not have to stretch much to believe that Ron might receive permission to publish this kind of detail.) You might have noticed that WIND has chosen to go quiet lately, no doubt believing that this financial market is not receptive to statements about opportunity, so why waste your bullets? If this is true, and if it is also true for numerous other companies, then the H&Q Technology Show is going to be shot full of holes from flying bullets.
A warning to short sellers: You are putting your financial health at great risk. WIND is hugely oversold and could double in price tomorrow - nobody knows. The reason I abstain from selling short is that even though I believe I would win at least three out of four times, the loss on that forth time might well be devastating. The unrelenting stress of a short squeeze is something I intend to avoid for the rest of my life.
Hope this proves useful,
Allen |
