Mason,
<< Are you complaining about dividends or do you like them?>>
>I love 'em! It's something that worries me about a lot of
>high tech stocks, to tell you the truth.
><snip discussion on dividend yield>
Oh, no! A cash flow oriented tech investor!
This can't happen! Run for the hills! :-)))))
In reality, you raised a great question. I noticed
that Michael Burry tried to discuss this on the Speedfam
thread, but I did not follow the discussion.
Anyway, I'll post here my naive and short summary on
cash flows.
OK. Companies report EPS, which is complicated
by the rules of accounting. That's why
some people look at the FCF (free cash flow). This is the
number defined as net income plus amortization and depreciation
(not real expenses!) minus NECESSARY (to sustain the business)
capital expenditures.
There is a thread that focuses on FCF as value criterion:
Subject 17762
Unfortunately they got swamped in some theoretical
arguments. ;-)
But let us forget the arguments whether FCF is a value criterion.
The thing to notice is that if FCF is negative, a company
at some point will have to borrow or issue shares to
to get more capital - it just cannot sustain its operation.
Well, that's bad for the investors.
On the other hand, if a company has a positive FCF, it
can use it to grow the business, to pay a dividend, or
to buy back shares. Most people agree that growth is the best
thing possible - it gives the highest return on capital.
Paying dividend is bad - it is taxed two times. So if the
investment in growth is unavailable, a share buyback is
the way to go. Any way you look at it, the nice thing about
a FCF positive company is that assuming that it stops growing,
it will be able to use its cash flow for either dividends or
for share buyback.
Unfortunately this nice picture is not so simple with tech
companies:
1. Most of them have negative FCFs and even negative
operating cash flows. (Don't even mention biotechs!)
2. But some of the best managers do the secondaries when
the stocks are overvalued (SFAM and others this summer).
Notice that Buffett advocates the same thing -
get the capital when it's cheap.
3. The stock buybacks in tech companies are just lip
service. The money would be better invested in growth.
The same applies to dividends (sorry, COHU and HELX).
But the best managers buy back stock after crashes. They
buy the stock that they have issued at the top (point 2)!
It's like shorting only with no downside. ;-)
4. The tech investors don't care about dividends, cash
flows, etc. They care about X,000% annual returns!
Come on, it's more fascinating to get 27% a day
from SFAM stock jump than to sit a year to collect
a 5% yield.
The above issues imply that unless there is a shift
in investor approach, there is no point in worrying
about cash flows of techs. They become important only if
the company is in danger of running out of money
(TRKN, SUBM). Doing secondaries and borrowing in a bad
situation is no fun.
The above reasons support Fisher's Superstock approach
to the tech investments. Just to remind:
1. Supercompany is a leader in its field.
2. Superstock is a stock of Supercompany cheap using PSR.
These two points ensure that the stock is cheap and that it
will eventually (in case of techs - tomorrow :-)))
come back up. Personally, I throw in some other
conditions, just to narrow my investment horizon
to manageable size. :-) BTW, removing the second condition
works in some cases - INTC, MSFT, CSCO. I just
don't feel comfortable enough to invest in these
cases. Also note, that superstock approach was defined
as trading approach - you have to sell at high PSR.
It can be used as a buy and hold approach with
varied success, I think.
CYMI was a superstock at ~$15. As were most semi-equips
a couple weeks ago. You can still buy KLIC and SMTL. ;-)
But - take a look at FCF before buying a non-tech. ;-))))
Good luck
Jurgis |
