Let's talk VISX. Some of you may remember that I picked up Visx in late 98 and got rid of it ~6 months later. That was rather premature, but it's valuation was too rich for me and it had risen too high too fast IMO. About a month ago, a friend who had not listened to me about VISX on its way up, called me and said that VISX had crashed and that she picked up a load in low 50s. I said "that is good trade. I wish you'd told me sooner so I could join you. It is bound to bounce back." Now when I say "trade" and "bounce back" I mean exactly that i.e. time horizon of less than 6 weeks and most likely less than 2 weeks. So when VISX hit 61, I called my friend and told her it may be time to sell those shares. Her response, "I already sold at 59 and bought March 90 Calls for $3". What?! I told her that this is big mistake and that she should get rid of the calls right away. I also told her that if VISX stays below 49 for a few days, I will go short, because VISX will be headed for low 30s.
How did I know that? Well, TA helped, but more importantly, I listened to the CEO's interview on why the selling is over done. He said all the right things, so there was no more good news that could come out the company in the short term. So if the downward momentum continued, there would be no reason for it to reverse. Add to that the fact that the company handily beat the estimates in the previous quarter, but stopped short of guiding the analysts higher for this quarter, as had been the norm for them.
Take a look at the chart. It tells a better story than I. But where does that leave us. Well, I closed my short position today. I give it a 50:35:15 chance that the stock will bottom here:~27:~21. But I am not going to stay short for that long. Once the dust settles down, I will be a buyer of VISX. Here is the case for VISX:
First, even though VISX lost their preliminary injunction against Nidek in ITC, and I fully expect them to lose the final verdict in early March, Nidek is not a viable alternative to VISX and won't pose a threat.
Second, for the year 2000, there is enough logistic and market forces behind VISX that their market will not be substantially effected. Any changes due to the legal/technological challenges will only start to effect their income in Q2 of next year.
Third, yes there will be some price erosion, margin pressures, and rate of growth slow downs in 2000. This is not so much because of the Nidek ruling, but the results of a maturing market. But that may be well balanced if the volume increase makes up for the margin loss. Nobody knows this outcome, not even the overpaid analysts.
What the Nidek ruling means for Visx, is that it increases the pressure on them to settles their patent disputes with their competitors, most notably BOL. It also increases the pressure from their customers to provide alternative pricing and sales models. These are not positives, but they are not such great negatives to justify the current pummeling of the stock. Anyone who did not expect them, simply does not understand how real world business works.
What to expect: It is estimated that there will be 1.3 million laser eye surgeries this year. IF there had been no changes in the market forces, about a million of those would have been Visx's and it would have revenues of ~$500M and operating income of ~$250M. So let's say that they hit a 20% loss in revenue and 10% hit in operating margins (which I think is too steep). Then they will have operating income of ~$180M. That is still a 27% growth for a company that sells at 4 times revenue and PE of ~17.
How will we know if the stock has bottomed? When the judge rules against them in March and the stock shrugs it off, it will be the sure sign that the bottom has been reached (barring any new developments of course).
My other theme for the year is to buy Semicaps. HELX was a great suggestion, I wish I had listened, but I couldn't figure out the company and the valuation seemed a bit rich to me. How high can it go and what's the competition valued at?
CYMI, KLAC, NVLS, and ASML have been my picks. They've done well so far. If NOVL does not start an up move in the next 4 days, I'm out of it. BTW, is there a way to buy a semicap basket of chip makers basket the way that you can buy QQQ or HHH?
Speaking of HHH, my other theme for the year is that this is the year that the internuts die and HHH will be my primary shorting mechanism.
happy trading,
Sun Tzu |
