Fred,
After thinking about the markets reaction to COMS/USRX, I finally concluded that it may not be as irrational as it appears on the surface. With the competition from INTC, COMS margins are probably headed south. As for USRX, they have already said their margins will go down from this quarters levels. Therefore, past performance can't be used as a means for placing values on these stocks.
So what is the new benchmark? As a start, I decided to see what would happen if COMS/USRX margins approached those of the box makers. The price to sales ratios of the top box makers are:
DELL - 1.7
CPQ - 1.1
GATE - 0.9
Average - 1.23
If COMS were to trade at a P/S ratio between 1 and 1.5, the price would be from 15 to 25. So based on past valuations, COMS and USRX look like real bargains. However, given the uncertainties they are facing, past valuations models could be dubious. Therefore, COMS/USRX still has considerable downside risk from even today's apparently low valuations.
Given all this, I decided to bite the bullet and sold most of my COMS and half of my USRX over the last couple of days. I used the proceeds to buy some BAY. BAY has similar valuations to COMS/USRX but isn't facing the same kind of direct attack. In addition, BAY is selling equipment to INTC and David House came from INTC so there is probably some kind of favorable relationship between BAY and INTC . BAY has also taken their "big bath" the last few quarters and there have been some insider purchases. Finally, It is going to take a turnaround in the network sector to lift COMS/USRX which will also boost BAY.
Hassell |
