A majority of these tech stocks have cleared to levels that now appeal to value investors (me). I've scanned through a thousand posts here, and haven't seen much discussion on what is reasonable or cheap valuation for a cyclical industry (TNT:tech, net, telecom) in depression, so let me give you my nickel's worth. By way of disclosure and using the gorilla game "grid" on page xxi of the book (checked out of the Tacoma library where I curiously noted I was the first to do so since Dec.,2000: about two years of disinterest sounds about right to a contrarian), I'd describe myself as high on public stock investment knowledge and low (but rapidly rising) on high tech knowledge. I'm low because I've avoided the sector until recently. Perhaps the collective wisdom here might assist my upgrade.
My first screen went to a few high profile stock lists for ideas. For sake of this discussion, I'll use a couple: July's issue of Red Herrings 100 companies mostly likely to change the world, and because we have a strong RTW participant (Paul) here, that list. I gleaned a few more names from RH briefing pages.
The first screen looked for balance sheet strength, measured as mkt cap over net working capital (NWC subtracts all current and long liabilities). A quick glance for bloated inventories or receivables was part of that process. If revenues were minimal (a real option theory play) or highly depressed (about everybody)I'd like to see no more than 2 to 1 here (or at least 50% NWC to mkt cap). If revenues were relatively intact, and the company operated above breakeven that could be lowered. PE ratios are a meaningless value measure in this environment. It's about survival and a core revenue base, as the assumption is that in one, two, maybe three years, these cyclical companies (despite the preaching in GG, when has tech ever been a pure growth sector: 97-00 was an aberation)will have "normalized" (mid-cycle) earnings again. Or better yet if selection is good or lucky, have entered a new tornado. At these current prices however, I don't think tornados are necessary to get a high return, just some normalization.
If the company was a promising crossing the chasm play (my assumption if they made these lists?), then I don't want to pay much more than 1 times revenue on an enterprise value (EV) basis (takes capitalization after NWC is subtracted). All the numbers used can be picked up quickly under the company profiles (see financials) at Yahoo Finance.
Example: RH stock Numerical Tech (NMTC):
33.9m out @ 3.90= 132 MC- 65 NWC= 67 EV, revenues are 45m. That's 1.5X EV/Rev. The stock traded briefly at 3.25, or under 1x EV/rev where I bought it.
If the company is one mentioned frequently on lists and by knowledgeable people as a potentially gorilla (realistic?)or a powerful King (more probable?), then paying 2x EV/revenues (IMO, a more aggressive investor might differ) is fair game. I'd mention that under this parameter CSCO would be a buy at about $8.
Example: BEAS:
406m out @ 5.40=2.19b- 300 NWC (count the cvt as debt that needs to be paid off)= 1.89b MC. over 900 rev. For a company of this caliber two times depressed rev, or the five buck area seems like very good value IMO.
That's the first simple screen. I'll go through more if anybody gives a hoot. One is insider ownership. My sense is that some of the more more promising chasm tech will be munch material before long. That's more likely to happen at a fair premium prices if the management (I know little about mgt reputation in individual companies) is an owner, not just a custodian drawing a salary. An example of one I was immediately drawn to is NUAN. This outfit is a net net selling well below NWC (of 130m: 3.87). Market cap @ 2.80 is 94m. Burn rate is about $10/qt. Insiders hold 45%, so the question is how long can they wait for a tornado? RH says about them: "Maker of speech recognition software dominates carrier market, but is a few quarters away from profitability".
Here are the names from these lists that roughly passed the first screen. Comments welcome.
MLNM
A
CIEN
SUNW: EV is only .50 sales, are these guys really that bad off, over 4b NWC?
SYNA
CPST (a net net)
RNWK
CRUS
NMTC
NVDA
BEAS
SEBL
TIBX
NUAN (net net)
Micromuse
LBRT (a net net about half of cash).
ragingbull.lycos.com
EPNY (close to a net net)
OPWV (a net net about half of cash)
IBIS: tiny mkt cap, just got a key order, inflection point?
biz.yahoo.com
SONS
More comments here:
Subject 53273 |
