From 'RedHerring':
redherring.com
MANAGEMENT METER
If you think about the most well-managed companies in technology, they have been constantly underestimated over the years because traditional accounting methods have discounted the hidden value of their superior management. Think about Cisco Systems (Nasdaq: CSCO). How many times during the company's lifetime have we heard the valuation curmudgeons moan about the overvalued price/earnings ratio on Cisco's stock? Well, Cisco's management team and well-oiled acquisition machine has consistently proven traditional assessments wrong. It is now one of the three most highly valued companies in the world. This, of course, leads to a whole new set of questions about the company's leadership, but it is Cisco's management team and acquisitions prowess that have accounted for the premium on the stock, not some kind of misguided investor bubble.
Baruch Lev, a professor at New York University's Stern School of Management, has studied this theory extensively, and he has come up with a term for it that Trilogy has borrowed in creating a methodology to value its investments: "knowledge capital." Using the knowledge capital concept, Trilogy analysts such as Mr. Desautels actually cook up numbers and assign a value to knowledge capital, which includes items such as the management team, the quality and number of patents and technology, and the skill of the engineering team. For example, Trilogy has pegged Microsoft (Nasdaq: MSFT)'s knowledge capital value as $210.9 billion. That's $210.9 billion in value that would be largely ignored by traditional accounting. Cisco's knowledge capital is valued at $105.4 billion, and Intel (Nasdaq: INTC)'s knowledge capital is valued at $170.5 billion.
The valuation curmudgeons have constantly missed the boat on emerging market leaders that were considered overvalued by conventional means. Some examples in just the past two years include Juniper Networks (Nasdaq: JNPR) and Brocade Communications Systems (Nasdaq: BRCD). These companies were often cited as being overvalued, with this column being one of the offenders. The people who dug down deep into the market, got to know how powerful each of these players was in its emerging market, and understood the knowledge capital embedded in the organization could have identified this value. Was there ever a time to get them at the right price? That's always hard to nail down -- but buying such companies on the dips over time has been a golden strategy.
So, under this premise, what is Trilogy holding? Mr. Desautels still believes storage and networking technologies hold promise for the long term. Some of the long-term core holdings of his fund, identified through these valuation methods, include Brocade, EMC (NYSE: EMC), Network Appliance (Nasdaq: NTAP), Nortel Networks (NYSE: NT), Juniper, and JDS Uniphase (Nasdaq: JDSU). |
