The market has done a good job of absorbing the early selling. It's interesting to see that NASD in the green after
1 PM today.
the Networking stocks are having a good day, and in fact, several good ones recently...the upgrades today
have helped.
EXTR, and RSTN have been strong as well.
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11:42 ET ******
Networkers : Robertson Stephens upgraded the shares of several networking companies this morning. The primary rationale for the upgrades is that expectations risk for the sector has peaked, and that as the economy improves, visibility will return and stock prices will rise. To establish which networking companies were best positioned to benefit from an eventual upturn, Robbie Stephens looked at three criteria: return on invested capital, earnings growth, and valuation. Five companies scored well in all three categories: Enterasys (ETS), Extreme (EXTR), Foundry (FDRY), Juniper (JNPR), and Riverstone (RSTN). All are rated Strong Buy, and all but JNPR were upgraded to that rating from Buy today; JNPR was already rated Strong Buy. The final part of the report focusses on determining price targets for these stocks. Robbie uses Cisco (CSCO) in the mid-1990s as the basis for its valuation. The argument is that these companies have operational qualities and a market opportunity which are similar to Cisco's during that period. The result is a 4x forward revenue multiple for these companies. That produces price targets as follows (current price in parentheses): EXTR 21.97 (9.80), FDRY 17.74 (9.04), RSTN 16.10 (7.42), JNPR 19.01 (15.86), ETS 26.46 (8.08). There are two key questions for investors looking to benefit from this analysis. First, when will the economy improve? We all agree that this recession will have an end, but there is tremendous uncertainty regarding the timing. An investment now could involve a long wait for results if the recovery is a year or more off, which is possible. Second, investors need to consider the theory behind the price targets. Applying Cisco's mid-1990s price/sales ratios to the current networking sector is an exercise in relative valuation. This type of valuation was a source of many mistakes in the bubble days of the Nasdaq. Absolute valuation approaches which rely on discounted cash flow models proved to be more useful. Investors should therefore carefully consider whether the comparison to Cisco in the mid-1990s makes sense. - Greg Jones, Briefing.com |
