Financial Analysts and Wireless Sector ...
My thoughts on same from a post I made elsewhere recently in a dialogue with a colleague who follows our game ...
<< Analysts have been calling for weakness "ahead" for Qualcomm for what seems like forever, but when have they been right? >>
I think that if you think back on the last 5 years you can find several examples for yourself, but you can probably start about mid-2000 with Ed Snyder, who along with Marc Cabi, is one of the analysts us Qualcommers love to hate. His calls from May 2000 through the summer and fall were spot on, however.
Unfortunately, very few participants of our message boards, actually read his analysis, and even fewer listened to him deliver. Instead summary briefs were posted and they quickly were distorted as message went to message. Only 1 in 20 posters had any idea what he said, and his rationale for saying it.
One could of course look at the analysis of the now infamous Walter Piecyk, then analyst at Paine Webber, and the spurious facts he used to project a price target of $250 pushing QCOM to an obviously unsustainable TTM PE of 775.
If you follow the whole comms and wireless sector, you might recall that Paul Sagawa of Sanford Bernstein "issued a report on networking and telecom equipment companies that basically argued that carrier capital expenditure spending was growing faster than carrier revenues, a trend he argued was unsustainable, and therefore the spending would inevitably slow."
216.239.51.100
The SSB comms team under Alex Cena was doing pretty much the same thing at about that time, much to the displeasure of us optimistic tech bulls who sensed a Bear but calculate that it would be of reasonably short duration.
Let's face it. While Qualcomm along with Nokia and Samsung may be one of the few financially healthy firms in the sector, Qualcomm's future is tied to the wireless sectors future. Today restraints on capital are retarding deployment of 3G3 infrastructure. Without that deployment, the deployment of 3G3 handsets in mass volume pushes out further and further and so does hard earned, well deserved, royalty flow to Qualcomm.
<< IMO, you give way too much credit to sell-side types...but it doesn't make you a bad guy. ;) >>
LOL! Maybe I am just ¼ or ½ or ¾ of a "bad guy?"
As you point out, it is always sage to remember that those analyst are, indeed, sell side, and it enters into 'the filter" but that fact doesn't make all of them, bad guy's now does it? ... 8:-)
<< Please refresh me on how we benefit from the "analyses" of these people? >>
What's this Royal WE, Xxxx Xxx? ... :-)
I'll tell you how I personally benefit, have benefited, and I'm just a guy that chooses to actively manage his own portfolios, several tax differed, which after 20 odd years of investing and building a few pensions that have rolled, and with a 6 to 10 year window to retirement are not as small as they once were (nor as big as I'd like them to be).
It is also important to note that I choose not to do this in a vacuum, so I don't do this without analyzing analysts, and analyzing analysts analysis and taking their analysis into account, as I make ongoing investing decisions.
I generally characterize myself as a LTB&H type, but that's not a religion, by any means,
While I am an inveterate Gorilla Gamer (and was long before Geoffrey Moore published "The Gorilla Game" - perhaps a byproduct of sleeping with "Chasm", and "Tornado" under my pillow for many years), I'm not just interested in market share and the competitive advantage and marketplace power that accrues to gorillas and to a lesser extent kings and chimpanzees and powerful princes, through CAP and GAP.
In addition to those principles, I am very conscious of DCF, and the generation of cash from operations, and because my window to retirement has narrowed somewhat I am slightly more risk averse than I was 5 years ago, more conscious of asset allocation and portfolio balance. I am hardly a valuationist, but I have always been conscious of both TTM PE and Forward PE and PEG and P/S ratio when evaluating my core portfolio holds. Certainly these indicators have more significance in a Bear than a Bull market. As for picking sensible exit and entry points that is something I have always been extremely conscious of and in a general sense have applied well.
So why do I absorb what selected analysts have to say, while not ignoring analysts I've filtered somewhat out, who might on occasion have something insightful to say?
It is a matter of doing ongoing DD on my current assets as they are now invested or as they could alternatively be invested.
In a general sense these analysts we are talking about, or at least the more qualified, have research tools, staff, market visibility, and in many cases industry experience and financial backgrounds, that I lack. The good ones also have well developed pipes to the companies they specialize in, and to the customers of those companies.
Before Paul Sagawa joined Sanford Bernstein, for instance, 5 years ago, he did strategy work for communications technology companies at one of the world's top management consulting companies, McKinsey & Company, for 6 1/2 years, which is a long stint at McKinsey. Snyder's (IEEE) credentials, Cena's, Luke's, and Hoffman's credentials, while varied, are reasonably impressive as well. As much as I like you and appreciate your commentary, your credentials don't match theirs. Mine CERTAINLY do not either, and simply stated, you and I do NOT have their tools, or staff. or time to do serious research on our own.
Their research, their analysis, their insights or lack of same, supplements abstracts from the research houses who are not sell side, from journalists whose qualifications vary all over the board, from discussions and news clips on financial discussion boards, and insightful posts from individuals like BRational, Dave Mock, --Mike Buckley, Dirty Dingus, the former Alice and Ralph Cramden, yourself, or talksfree, to name just a few of the many diligent individuals with various analytical skills, and most importantly, differing perspectives, who populate these boards, that make our discussions worthwhile.
Applying this to Qualcomm, and since you are familiar with gorilla speak, I'll quickly touch on where I think analysts fit into the picture, and how I have used their analysis, while I did initial DD on Qualcomm, and continue to do so.
Qualcomm went on my watch list in November 1994 immediately after I attended a CDMA demonstration as a guest of one of my prospective customers at AT&T Labs (now Lucent) in NJ, and I watched them rather closely through 1995, 96, and 97.
I typically rebalance my portfolio every year at end of year or thereabouts and at the end of 97 Qualcomm narrowly missed the cut as an add to my equities portfolio. Had the decision been made one month earlier by ETSI and newly formed 3GPP, to utilize wideband cdma for the access methods of the UMTS UTRAN I might well have pulled the trigger on Qualcomm, even though Moore would say (later) that I would have been premature, and upon reflection he would have been correct.
One year later I was back to annual portfolio rebalancing. Moore had published "The Gorilla Game," I had given it a second very careful read, and as a vocational matter I was crunching subscriber numbers by digital technology. It was already apparent that cdma was a discontinuous innovation, that Qualcomm exercised proprietary but open control of commercial narrowband cdma architecture, and that at least using the subscriber metric cdmaOne was in hypergrowth - across the Chasm, through the bowling alley and entering the tornado as Geoff had said in applying his unique overlay to the technology adoption life cycle.
Having arrived at some preliminary conclusions, I hustled up every analysts report I could lay my hands on, obtainable from my 3 brokers and elsewhere. [As a vocational matter I had already had access to several of the research houses detailed industry overviews.] One of the most significant and detailed was a 30 or so pager from Alex Cena's SSB team. Along with some inputs from some solid TA specialists it was somewhat of the clincher to a decision I'd already arrived at.
I exited a longstanding NOK (then a prince in Geoff's terms) long position with 300% appreciation and plunked it into QCOM at an entry point of ~$7, and enjoyed the partially justified, partially go with the Mo, partially go with the Y2K melt up , punctuated with war hoops of "GSM is Dead" 2600% sleigh ride.
I reduced QCOM 25% on 12/31/99 at $184 as a matter of portfolio balance and sheer common sense and started paying attention once again to what the more competent analysts had to say. I reduced again at an average of about $139 im March/April 2000 as a matter of both portfolio balance and a sense developed on my own and because of industry analysis that carriers were stretched, and that carriers had not exercised common sense in IMT-2000 licensing in the UK, Germany, and Italy, and that CDMA2000 wasn't faring well v. 3GSM WCDMA in technology choice for carriers being licensed for IMT-2000 - getting back to Moore's theory, borrowed from Morris and Ferguson, of the necessity of having proprietary control of open architecture, to achieve CAP & GAP competitive advantage, and other competitive advantages that accrue to a gorilla or local gorilla (chimpanzee).
Snyder made sense to me in summer of 2000 because he backed his comments with incredibly well documented research (and if you read them, or heard them, they were much less unfavorable to Qualcomm than what cheerleaders and wishful thinkers on the various Qualcomm threads distorted made them out to be), and the Sagawa and Sanford Bernstein, SSB, and Lehman Brothers stuff of the fall forecast trouble for tech, trouble for fiber-optics, trouble for wireless and Matt Hoffman also had good backup to his comments of that era 9even though some turned out to be unrealistic.
I made my final reduction of Qualcomm, based on several observations, many from analysts leaving a substantial core position I still retain in late January of 2001, after a nice tech bounce in late fall 2000, at $89. That funded the majority of a reentry to (now king) Nokia at $12.75 8 months later after parking patiently in cash. I now own 3.4 long core shares of NOK for every QCOM share I vacated, and today each Qualcomm share is only worth 1.95x Nokia.
Since then, I have made one wireless portfolio add (from that Qualcomm pot sold at $89). I added back a chunk of Qualcomm at $25 last year, because irrational sentiment was pervading the market (no analysts involved in that one).
... and so it goes.
That's where I personally fit sell side analysts research into the broad picture. Works for me. Others can apply different methodology if it works for them. We each have different goals, different amount of time and money to expend in maintenance of our portfolios, and different risk tolerance.
All JMHO and FWIW.
Best,
- Eric - |
