The Case for Brocade
By James J. Cramer
8/23/00 8:34 AM ET
Why bother to own Brocade (BRCD:Nasdaq - news - boards)? In these cyberpages we have seen a prosecution against this stock that would normally daunt any thinking person. Why are we at Cramer Berkowitz buying and owning this massively valued equity, the one that Jim Seymour warned us was dangerous to invest in because of its 500-times-earnings multiple?
Simple. One word: execution. Brocade has executed better than anyone else in its space. This market loves, adores and pays up for the executors. And it shuns those who fail to deliver. As long as Greg Reyes and his team execute the game plan, we will stay long Brocade. If they fail to execute, we will sell. But if that occurs, we will have made so much money in Brocade that it will more than make up for whatever we might give back if the run ends.
Matt Jacobs and I talked about this Brocade debate endlessly yesterday. (As an aside, I consider this kind of debate -- and not the debate over quarter-point Fed increments -- to be at the heart of how to make big money in the market. We are not filling airtime here, we are trying actually to help each other make money. That is the crucial difference between TheStreet.com and the folks on television, by the way. And I ought to know.)
We focused on why we still like Brocade despite the brickbats and the analyst calls and the incessant dumping on this equity. One thing we realized is that it is monumentally hard to find a company that has shown the growth that Brocade has out of the box. Maybe Juniper's (JNPR:Nasdaq - news - boards) and Sycamore's (SCMR:Nasdaq - news - boards) growth have been a little higher, but both are trading at a premium to Brocade. (We own both.) In this August 2000 market, companies that are showing amazing growth are the stocks that are trading at or breaking new highs vs. the companies that have huge market potential, but don't have the results yet to justify the valuations.
Why won't we pay up for others as we do for Brocade? Often it is because that they can't ever be huge, no matter what they do. Brocade can be, so we stick with it. Take two of Brocade's competitors, Gadzoox Networks (ZOOX:Nasdaq - news - boards) and Vixel (VIXL:Nasdaq - news - boards). They both had huge runs because of market potential. However, they got destroyed, as they should have, when they failed to execute, Brocade has been rewarded with their market valuations.
Last quarter, Brocade showed the beginning of an acceleration of growth where it will sell a much more significant solution, including more switches and software than it ever has before. The entrance into this phase shows the beginning of an evolution to a more value-added company, and not one that will end any time soon.
As far as Ashok Kumar's coverage of Brocade, well, let's just say it raises eyebrows. Kumar downgraded Brocade on May 22, at 101. (That's the price you could get if you sold that morning. We know; we bought.) The stock had been 80 points higher about two months before the downgrade. We all know that, since then, Brocade has soared to new highs and has actually gained 100 points from Kumar's downgrade. I would suspect that if I were in Kumar's shoes I might also be working hard to get the stock back down to where I took people out of it. I think I would be as relentlessly negative as he has been if I had downgraded it at such a horrible time, if only to show the flag to all of those who shorted it when I socked it.
Finally, we feel comfortable owning a stock when the world knows the bear case and the stock still keeps its valuation even after the negative press and analyst reports. Kind of reminds us of Cisco (CSCO:Nasdaq - news - boards) a few years ago. Or Sun Micro (SUNW:Nasdaq - news - boards). Or EMC (EMC:NYSE - news - boards). So, you keep fretting about Brocade and we will keep owning Brocade and at the end of the day, or month or year, we will see who does better. How will we know? Simple: If it is higher we are right, if it is lower you are right. Place your bets; we have. |
