Hi mindmeld - a bit of Vulcan logic, just for fun, before getting serious.
You say you said year 2000 was going to be Nortel's year, yet you bet telecomguy that CSCO stock would appreciate more than NT.
So, in revising your outlook (2001 will be CSCO's year) you would bet NT stock appreciates more than CSCO.
And since you lost your bet with Telecomguy, we should take the other side from whatever you bet.
Which means we should bet on CSCO versus NT this year.
Any way you win, you lose.
<Above to be read with tongue firmly in cheek>
Seriously, I don't get the 30% appreciation figure. In fact, neutral enough to be out entirely. So perhaps we can have some healthy discussion.
Although it should go without saying, everything I say is my own opinion. So please don't anybody come down my throat about undefended bald assertions. I have spent four or so decades building my opinions and won't even try regurgitating the full depth of their origin in a 20 minute post - even if I knew where they came from. And forgive any spelling errors, I get lazy late at night.
I will try to scratch the surface however. Which surface is large. Here goes.
First, for context, as I believe one's point of view determines what they see... My own investment strategy is directed towards breaking the bonds of wage slavery. Which means it needs to earn me income to live on.
Having achieved a certain level of independence thanks to full participation in the longest running bull market in history, I am reluctant to permit it to slip away.
Consequently, I have shifted as of this year (decision: July 23) from an agressive growth strategy to one of preservation of capital, setting up a predictable income stream to hold long term. With a side show of play money towards huge returns (or total loss) a.la. VC which has not yet been committed. The rest a few investments which I like, but which haven't yet finished playing out.
Which strategy I can afford because of the fruits of a voluntary wage income, another high-tech income in the household, zero debt, and a cash-flow-positive lifestyle.
My intent is to build a large base of capital, which will churn out a predictable stream of ready cash for me to live on in the style to which I am accustomed, without depletion except for major (medical?) emergencies as I relax.
My style is right-down-the-pike boomer. Hard working high tech. Drive an SUV that I bought before the acronym was coined, own a 4 bedroom brick home on an acre in the suburbs, (two offices, three e-mail addresses & more phone lines than kids & pets), plus a few expensive toys that I don't use as frequently as I thought I would when it seemed like a good idea to have them.
I watch CSCO as an indicator of the market, but <gasp> have no position currently. It doesn't fit either segment of my new portfolio strategy: yeild of zero sucks on the "income" side, likelihood of CSCO going to 300 in 24 months is low on the VC side.
Having been a raging bull and enjoyed the results, I have endured one too many gut-wrenching "corrections" as of 1Q, and am neutral to bearish in the market as a whole. If nothing else, this outlook helps me avoid the debilitating and premature aging effect of checking my portfolio every 30 seconds.
And my predictive skills are imperfect. Along with some dizzying gains, I also hold 350 shares of Laidlaw as an object lesson in the meaning of DD, and other less spectacular negative gains. I missed bre-x, but spent a while wishing I hadn't. I offer this as proof that I may be uttering pure tripe... readers form your own opinion.
That's enough about me to frame context for my point of view.
How do I view CSCO through these shaded glasses?
Start with "fundamentals".
Important to separate "price" from "earnings", despite fixation on the PE ratio. Not all ratios are equal.
In my dim view, company currently priced as though it continues its 50%+ growth somewhat "indefinately". That is, I have modelled it as "fairly" priced today (at $60) vs. the likes of GE and the other large caps - assuming that each maintains their respective growth rates, market segments, portfolio distributions etc. Basic discounted free cash flows. For the "fundamental" analsys to come out "fair", I did have to assume a time frame of between 7 and 10 years to breakeven.
Breakeven? CSCO is teeny compared to these big guys, but growing more quickly. I consider "breakeven" to be once teeny has grown bigger than big by enough to make up for the interim shortfall - all calculations discounted by a meagre 6% (T-Bill rate). It gets worse for CSCO if I use equity rate discount of 11%. So I can't be accurately accused by CSCO fans of fudging the numbers.
I then applied a reality check to my assumptions, and a sensitivity check. The one that matters in both is that CSCO continues growing at pace.
I believe that in this world, all things are possible. But some things are less likely than others. It is possible that CSCO will execute continued hyper growth for 7 years. It is more likely (my unsubstantiated, but firmly held opinion) that somewhere in the next 5 years that CSCO will report less than penny-perfect earnings, or have the misfortune to eat something poisonous, or churn its top management, or change its posture towards risk and return... or see investor sentiment shift from "growth" bias towards "income" bias, or any of the above in combination, or encounter something entirely unexpected.
Even giants stumble.
And it is probable that in the event of CSCO stumbling, that the market reaction would be punishing. This could defer the breakeven point beyond the patience of many who would call themselves "long".
But even if we turn a blind eye to this possibility and assume the company is fairly priced, then the first conclusion is that at between $50 to $70, one should expect the price of the stock to keep pace with the other big caps.
My model factored in continued performance & growth at current rate for all companies. So give or take they should all move together except for differences from their current track.
Which doesn't net out to 30% growth. For that to occur, CSCO has to out-perform itself by a healthy margin. Which means beating estimates handily, not meeting them to the penny. I can't bring myself to expect continued price appreciation much in excess of 15%.
So much for a macro view. What about specific risk factors.
Even your suggested 30% per year growth is somewhat anemic vis-a-vis what we have been enjoying. Given that its stock price performance is key to its core strategy in multiple fronts, a reduction in appreciation rate adds risk to execution. Which is a vicious cycle in the wrong direction.
To the upside however, they can now issue quite a few million shares with negligible dilution - so the bank of CSCO is likely to remain a reasonable currency for at least a year or two even if it does not appreciate at all. If it begins to negatively appreciate, or become viewed as a weak currency, CSCO could be in deep trouble in 12-18 months.
I've heard a lot of hoopla around "optical". Sure, it's hot now, but will it be "hot enough" by the time that CSCO is achieving a significant revenue stream in this segment? Your target 4B$, while large and almost 3x from here, would still have CSCO in the chimp status when measured against the whole market.
If 4B$ and growing at 50%/year is worth 120B (30% share price increase), then LU shouldn't be foundering... And NT which has been growing optical by more than 4B in a year would deserve a higher market cap. No, I wouldn't bet CSCO on the holy grail of "optical". Even if they badge everything with a fiber plugged into it as "optical" it is unlikely they will rate in the top 3 within 24 months. Hardly something to build an additional 120 B$ market cap on. So it's gotta come from elsewhere.
We've gone from "performance" to "bandwidth". The next logical step of the eternal computer trio of bottlenecks is "storage". Oops. CSCO doesn't play here & could miss the boat entirely - compared to SUN, NTAP, maybe NT & other recognized "server" experts.
Service Provider segment is new, and shows promise. Hotly contested and difficult to read competitive field... Here is where I need help understanding - not readily within my field of vision and I don't see how CSCO plays as much as say SUN or IBM or other recognized "network" vendor. Not to say CSCO couldn't become recognized, it's just I don't know how I'd recognize them as leading. Very confused market that everyone claims to be in these days. Could be very big, very poorly understood (by me). So I admit that one thing I don't understand could make a big difference. I just have a hard time making investment decisions based on something I don't understand.
Another thing very much in its favor. Cash. CSCO is a cash machine. Enviable. Depending on where they invested it and the degree of liquidity of investments... possible they could finance a considerable buying spree from cash if a new market emerges or if CSCO experiences a deflation of their currency. That's got to be a plus. And it's come out of nowhere. This has me looking at the cash flow statement in awe, and also extremely curious. I want to see the disposition of short term versus long term investments in the 10K, and read the footnotes carefully. I am wondering the degree to which these "investments" might be vendor financing, and to the degree of exposure to the equity markets. Very bad if their hedge against stock depreciation evaporates with the market, and almost as bad if it's been locked into financing revenues.
Wouldn't be topical if I didn't touch on this recent capital crunch thing. As we get more information coming out it's appearing worse for the new starts than the incumbent carriers, and CSCO's own rhetoric emphasises that major thrusts are geared towards this segment (edge vs core, ASP versus Carrier, new vs old, blah vs blah). In parallel, VC money is becomming more difficult on the new starts (edge, asp, new, blah) - more financing pressure. Smells to me CSCO faces greater financing risk than her competitors.
So I keep looking for this missing piece that would add 120 Billion dollars to CSCO's market cap, for an increase of 30% ... and everything I see to the upside has been factored in, while there are many things to the downside I factored out. The balance rests where I do not understand. Makes me nervous.
Before commenting on my naive perspective on expanding markets and all that, I've already factored in continued growth at 50% for 7 years as a given for the current price & macro trend. And adding 100% of 1M$ revenue stream only contributes 1% to a $10B revenue stream... so they have to enter and clobber new territory at a rapacious rate. So my assumptions take into account capture of major share in explosively growing markets, without having to be too specific about what that market space is. Except it would give me comfort if I had a clue what it was.
Which concludes fundamentals. Bottom line, fair is fair, but it's pricy for the risk.
We all know that fundamentals don't matter any more, or at least that's my opinion. It's all about supply and demand. And demand has been so high that we now have enough supply to give one share to everyone on the planet. Demand. That's what it's all about.
But will demand continue to grow? We boomers are getting older. Some of us who are buy & hold have started looking to buy those stocks we will hold to retire on. We (and I speak only for those folks like me) don't want to plan on having to live by selling off our capital.
I don't want the bother of having to plan to die before I've depleted my capital base. The prospect of being pleased with how long I have lived, only to be miserable having ran out of capital to dispose of does not appeal to me. Old & broke... please, not me. And there's my family to consider too - not just me. Nope, I'd rather leave something to my son than have him feel obliged to care for me. And then, if he doesn't decide to care for me I can at least be spiteful and give it to someone else <g>.
Nope, we would prefer the stodgy old dividend spewing equities we can hold on forever. Being true "buy and hold" we buy for the stream of earnings and then we can pretty much forget about the price. In fact, we want it to go down, so any unspent dividends can be reinvested at a higher yield.
Old folks have a strange perspective, no?
The less aged amongst us are still looking for growth. And not being so old, so am I. Let's see if we can pad this nest up a bit, shall we? No harm.
We've been around long enough to have the foolish notion that honkin' big growth stocks are an oxymoron waiting to happen.
I'm willing to let the spring chickens of the new economy prove me wrong and maybe miss a mega cap become a giga cap here or there. But it's a fact that the little stocks have upside odds in their favor - the most they can lose is 100%, but the upside is factor 1000. So small caps are where I'm hunting for growth. The hunting for insects is more difficult (there are a lot of them!)... but I am patient.
In my view, CSCO should appeal to someone who has patience to hold a little-big-cap Tech stock for the long term payout, and who plans to avail themselves of return by selling it later. I am not that patient any more. Neither am I willing to take the risk that few see.
A buy now, sell later strategy is effective on the expectation that when I want to sell there will be a lot of people willing to buy it (supply and demand drives price, not fundamentals). For some strange reason, me and all my boomer buddies appear to make very similar decisions at very similar time frames. Like I go buy an SUV, novel idea (I thought). Not long thereafter, the roads and driveways (and ditches) are filled with the things. I buy into a company, and it goes to the moon. I sell and it plummets (or on more than a few occasions I think I should sell but wait too long and then I'm wishing that I did).
And the only way to get money out of CSCO is to sell the stock. Until then, all gains are merely hypothetical. Big deal you have a million bucks worth of inedible paper. Got to get it out to eat. A month ago we were pushing 70. Now pushing 60. Next to gasoline, no consumable has that kind of fluctuation. So firstly, if you do plan to generate cash by liquidating capital, it is highly exposed to fluctuation.
Secondly, for me and the rest of my co demographic-indicators, an "I plan to sell CSCO in the future" plan is very likely to backfire... there being a lot of boomers and all. My luck we all decide to sell together and end up on the wrong side of the supply and demand curve. Bad news. Not for me. Quite possible that used SUVs could be real cheap next year.
I noted that I needed to sell early. Too early, I miss a bit of up. Too late has been worse. So better early than late.
Maybe this current weakness is because a few of us are thinking similarly. Triggered like it was for me by the dizying heights of the first quarter and thinking "time to secure some of this against... oh darn..." and then advantaging the recovery to ease out near the top (causing it to be a top perhaps).
It's not just CSCO. Looking at the other equities, mucho instability particularly amongst those with high PE and no yield.
Last one out loses.
To sum it up: CSCO seems fairly priced with a lot of risk and I need to get out earlier than my buddies... so now seems like a bad time to get in.
I still need more upside to realize my goals - so I want the bull to continue.
So I would rather look on the bright side.
The company deserves a high valuation. Firing on all cylinders and adding more as it motors along. Flawless execution, guidance to the street, gets a lot of respect. That CSCO cachet is extremely strong.
Which is why it has a high price, relatively speaking.
And why I wouldn't go so far to call the company dead money: growth potential is there. Add to that, there are too many money managers' necks on the line to see this one bleed out like LU. So I don't think this is a losers' stock.
How might it move? It appears to me (a) highly valued and (b) highly traded. Both factors mitigate against an explosion to the upside. Any up will be gradual. To the downside, this flighty market could trash it by 30% in a moment and the majority of lt holders could exit with 1000% gains... not much "support" there. Amazingly, my "long" view and bambs' daytrader view coincide quite precisely here. The good news is that with 7B shares, even a mild hustle for the exits will probably clog the exchange and force a halt during which reason might return.
You called target. I suggest instead we will see a continued 10-20% trading range, around a midpoint echoing market sentiment, which is currently mildly bearish. Similarly, I think as you do that if there is a fall rally (I am not so sure one will materialize), the trendline will revert to bullish. Been my view that sentiment drives this one more than news.
Long term even in a bearish market I would call the trendline upwards, particularly as the risk of failing to keep pace diminishes with each lap they run at the same rate. But I expect trendline to plunge on any hint of misstep. A "rational" market would temper the price growth in the low teens, with a 20% volatility either side.
Hey - we agree. We could see 30% upside in 12-18 months (15% up + 15% volatility). But it would be a fluke, not a trend, and exposed to volatility to the downside. Those trading for timing might try it. Me, as a long-term guy, I average these peaks & valleys out and watch the midline.
So my view if it hits 80 it is likely to be at or near a top with a subsequent ride back to the mid 60's and so on. Converse is true. Could be we plunge 30% to the 40's & back a fair bit somewhere along the way too.
I don't see a "steady ride up" anymore.
What investing stance would I take? I would not invoke the sure loss of capital gains tax to unload portfolio at these levels, as would have been ok back in April. Just wouldn't put more money in.
If waiting to buy, what decision points?
Next earnings is key. Many are calling for an after-election shift of the winds. Seems by your view of timing, we can wait a bit & not miss much if upside materializes, I tend to agree. Particularly during current softening. So I intend to revise outlook after election & earnings dust has settled.
I'm not sure of a fall rally. Maybe everyone's bushed after being so gored, we take a bit of a break.
If blowout earnings and the stock does not gap up (and stay up), take as confirmed priced to perfection long term - may want to take some of your gains off the table. This signal has worked quite reliably as an early bailout indicator on high PE equities for me in the past.
Enough ramblings. Fire away.
Disclaimer: this is my own opinion and reasoning, derived without the benefit of a clear view of the future or of all relevant facts. I have presented evidence of previous inaccuracies of judgement. Please form your own opinion.
John. |
