ditc in this weeks barrons.
Q: Your funds had spectacular performance last year. Are you worried that we're in a mania and that a horrible shakeout lies ahead?
A: That's the ultimate question. The market is so stretched when you take into account the performance of the technology and health-care stocks we favor. And yet the rest of the market is not really doing that well. I think 2000 is going to be a rough year, a difficult year, a tricky year. But I don't think it's going to be a down year, except maybe for the Dow and the S&P.
We think we can still find plenty of winners among the small-caps and produce positive returns. They are still trailing the S&P on a relative basis even after the tremendous surge in the small-cap market since October 1998. These types of moves tend to last a couple of years, so we are clearly late in the move. We have reduced our technology exposure from over 70% to around 50%.
Q: Given your caution, what do you like these days?
A: One company we like a lot is Ditech Communications. They make echo-cancellation equipment. These are devices that suppress the sound delays in long-distance phone calls that people find so aggravating. And with more and more use of wireless communications, there's more and more demand for echo-cancellation equipment. This market was historically a half-billion dollars a year, but it's starting to grow at better than 20% a year. Ditech competes against Tellabs, but has a superior product and is taking share away by winning a substantial chunk of new business. The company also had a huge earnings surprise in its latest quarter, ended October 31, reporting 53 cents, versus what had been a consensus forecast of 30 cents a share prior to a November pre-announcement.
Q: Trading around 182, the stock isn't exactly cheap, is it?
A: Maybe not. But this company could earn as much as $2.50 during the fiscal year ending April 30, 2001, and, maybe $3.50-$4 in the following fiscal year. Last week, it beat the consensus, earning 41 cents on a post-split share in its third quarter. That would bring its earnings multiple to 50 or under, which is cheap in my universe of stocks. Look, this is a company that could compound its earnings growth at around 40% over the next three years. |
