Dan - I've posted below the article (such as it is) from Barron's, so that others can share our chagrin. But what's that expression - something like "You can say anything you want about me, just don't spell me name wrong." With company like Cascade Communications and PairGain, maybe MRVC will finally get some interest from analysts. (Wouldn't mind having a piece of the former right now).
I also e-mailed a copy of your letter to Barron's; maybe they'll feel chastened enough to follow up with something good. (yeah, right).
Highflyers
Have these 30 stocks gotten ahead of themselves?
Eric J. Savitz
Table: Thin Air
t's as if nothing had ever happened. Almost overnight, technology stocks
have moved back into the limelight; the summer stumble is now ancient history. The
sector's recovery, which began gradually in July, accelerated two weeks ago,
thanks largely to Intel. The chipmaking giant dispatched the Street's concerns about
personal-computer demand, announcing that sales for the September quarter would
be up about 5% from the June quarter, on better-than-expected demand. Then, last
week, analysts began bubbling about firming prices for memory chips, in particular
D-RAMs, apparently due to robust sales to PC makers. As The Wall Street
Journal pointed out last week, fund managers and individual investors alike have
been flocking back to some of their old favorites, with sharp recoveries in the
shares of such recently scorned merchandise as Micron Technology, Texas
Instruments, Ascend Communications, Read-Rite and Micro Warehouse.
Indeed, for all the moaning about how difficult 1996 has been for technology
investors, a remarkable number of computer, software and semiconductor stocks
sport huge gains for the year - and many now trade at valuations that seem more
than generous. We can say that with confidence, thanks to FactSet Data Systems,
of Greenwich, Conn. At our request, FactSet scanned the CompuStat database to
find vulnerable highflyers: stocks that have racked up fat gains and now trade at
large multiples of earnings, sales and book value. For starters, we limited the search
to stocks that have risen more than 100% this year and now have market
capitalizations of at least $250 million. Then we honed in on companies trading for
at least five times book value, five times trailing 12 months' sales and 50 times
trailing 12 months' earnings. As a concession to the truly fast growers, we knocked
out companies where the anticipated growth rate of earnings exceeded the stock's
price-to-earnings multiple. The results of the screen, which turned up 30
companies, are displayed in the adjacent table.
We certainly turned up some high-priced merchandise. The average stock on the
resultant list has more than tripled in price this year, and now trades for 13.5 times
sales, 17.3 times book and an ethereal 131 times earnings. By comparison, the
S&P 500 trades for about 20 times earnings; the Dow Jones Industrials, about 18
times.
As we've hinted, most are technology and telecommunications stocks, though there
were a few exceptions, including a pair of oil and gas companies and a few
health-related firms. It shouldn't come as a surprise, though, that the majority of the
stock market's most high-priced, highflying merchandise consists of tech shares.
Are they all headed for disaster? Not necessarily.
After all, screens like this one provide only a first cut, a starting point, for serious
investors. And many of these companies really do have excellent prospects.
Perhaps there's still good reason to buy the likes of SystemSoft, which trades at
26 times sales, 28 times book and 171 times earnings, or Citrix Systems, at 42
times sales, 25 times book and 129 times earnings.
But their stratospheric valuations leave little room for error. Almost three years ago
(Nov. 22, 1993, to be exact), Barron's ran a similar screen. That time, we sifted
the stock listings for companies with market caps of $100 million or more and
year-to-date gains of at least 100%, that were trading for at least five times book,
five times sales and 30 times trailing earnings. (It's worth noting that we had to
toughen the requirements this time to keep the list to a reasonable size.) A few of
the 19 stocks that showed up on the original list proved to be worth their price.
Oracle, Thermo Cardiosystems and Total System Services, for instance, all
subsequently posted huge gains. Four companies from that original run - Snapple,
Megahertz, Clinicom and Zenith Labs - were later acquired. But others stumbled
badly, or went nowhere, including Marvel Entertainment, Petromet
Resources, AutoTote, Executive Telecard and Applied Innovation.
We have no doubt that some of the stocks turned up by our latest scan are headed
for similar misfortune. Clearly, we're not the only ones who see it that way. As it
happens, some of the stocks on the list have already attracted considerable
attention from short-sellers - nine of the 30 stocks on the list have short positions of
at least one million shares. The most prominent name in that group is Cascade
Communications, a hugely successful maker of switches and other gear for
telephone carriers and Internet service providers. The company has a market cap
of nearly $7 billion - that makes it about the same size as Georgia-Pacific, which
last year had sales 100 times higher than Cascade's. Apparently anticipating a
slowing of Cascade's remarkable growth rate, the bears have sold short 8.5 million
of the company's shares.
The shorts have also targeted Chesapeake Energy, on the theory that the
company has overstated the prospects for its acreage on the natural-gas deposit
called the Louisiana Austin Chalk. Chesapeake's short interest jumped to 5.6
million shares at mid-September, up from 3.7 million shares a month earlier.
There also remains a considerable group of skeptics about Zoltek, a provider of
carbon fibers for a variety of applications. Last week, Zoltek disclosed that the
SEC has begun an informal inquiry into its stock. Zoltek sports a short interest of
1.6 million shares.
Cascade isn't the only stock on the list to benefit from the revolutionary changes
affecting the communications industry - investors have bet aggressively on a wide
range of companies seeking to take advantage of the fast-changing telecom market.
There's DSP Communications, which makes chip sets for digital cellular phones,
and MRV Communications, a seller of fiber-optic cable and local-area-network
products. The screen also turned up Vitesse Semiconductor, which makes
gallium arsenide chips used primarily in communications gear, and PairGain
Technologies, which offers ways to increase the data-carrying capacity of copper
wires.
And there's more where those came from, like Tellabs, which provides telephone
companies with equipment to link copper and fiber-optic lines. Also, Saville
Systems, which offers telecommunications billing programs. And Uniphase, which
has a fast-growing fiber-optic equipment division.
Though communications plays dominated the list, the screen turned up clues to
other hot business trends, as well. Two companies we found - MRV
Communications and APAC Teleservices - offer telemarketing services. (Blame
them next time someone calls you in the middle of dinner to give you a sales pitch.)
Several others, including Legato Systems and Renaissance Solutions,
specialize in software and services for client/server computer networks.
Also attracting attention are companies that help other companies in handling
customer-service and help-desk operations, like Vantive and Technology
Solutions. Transaction Systems Architects provides software for electronic
funds transfers. McAfee Associates sells computer-network security software,
distributing its products primarily via the World Wide Web. Viasoft, the biggest
price-gainer on the list, has seen its shares skyrocket more than 700% this year on
expectations of a windfall from helping Corporate America solve software
problems associated with the arrival of the year 2000. Both Jones Medical and
Rexall Sundown sell nutritional supplements.
Granted, many of these companies have excellent prospects, with above-average
growth, and they may deserve above-average valuations. But they have little room
to maneuver. At the slightest hiccup, these stocks could come crashing back to
earth. Proceed at your own risk. |
