To ALL: Don't Be Too Hard on CPQ
Indeed, It was an eye opener for all CPQ shareholders to watch in horror the way DELL stock price moved in the last few weeks 9 points plus in one day! However do not lose heart. In time our CPQ will provide us with a decent return for our money. Please consider the following points.
1) Price action from October 1997 to Dec 1997 was caused by many institutional investors reallocating their assets from equity market to the bond market in what they called flight to quality, due to the Asian flu. As a stock with high institution ownership (More than 81% in October 1997) CPQ stock price was hit hard. The downward price action from Oct 97 to Dec 97 was caused by a market event, and did not indicate any major shift in CPQ fundamental.
2) DELL up 9 points plus in a day is mind bogling however in percentage term it is really a regular break out moves. On 2/18/98 DELL closed at $113 3/16. The next day 2/19/98 it closed at $122 3/16 up $9 5/8. In percentage Dell was up by 8.5%. CPQ also has a similar moves this year. Earlier this month on 2/2/98 CPQ closed at $30.5. The next day 2/3/98 it closed at $33 up $2.5. In percentage CPQ has gained 8.20%. So CPQ recent price action can be considered compareable to DELL.
3) Option Expiration date. When CPQ made its big move in the first week of February many investors and speculators purchase CPQ Feb Call options like crazy. Consequently CPQ price will be under pressure one week before the February CALL options expire. Why? When I or any other person buy a call option the Market Maker (MM) writes a call. Contrary to many investors believe. To protect their position the MM do not buy the Put Option, instead they buy shares of the underlying securities. For example, if I buy one Call contract of CPQ Feb $35 (CPQBG) The MM do not buy one Put contract of CPQ Feb 35 (CPQNG) to protect their position. To protect that position the MM buy 100 shares of CPQ as soon as they write their CALL Feb $35 to me. In other words MM writes a covered call so I, and other people can buy Feb $35 CALL of CPQ. Remember MM lives on the spread and commisions only. They do not have to gamble their own money. So if CPQ stock price is more than $35 let say $36 Dollar MM do not lose money, because they still keep the money from the spread of the bid and ask. Unfortunately these MMs are greedy people. Instead of just letting their 100 shares of CPQ got call out and done with it. Here is what they usually do. One week prior to expiration date they starts to push the price of the underlying securities (CPQ)down. They sell their 100 shares of CPQ to drive down the price below the $35 strike price, so the Feb $35 Call will expire worthless. Now the MM got the commission money, the spread money, and also the call premium that the average investors pay to buy the call. In this example, we are talking about one contract. in reality it could be more than 50,000 contracts for a particular call strike price.
4) CPQ is not a box maker company anymore with DEC aquisition. CPQ now is a one stop solution provider. Mr. Pfeifer knows that he cannot directly attack DELL's direct model directly. So he uses the indirect method to blunt DELL offensive in the corporate market, by providing CPQ corporate customers with more comprehensive services, and solutions with the DEC aquisition. Soon DELL's specialized market segment (the corporate segment of the computing market) will get smaller, and DELL will become like MUEI (just another mail order company). As for the other computer companies (IBM, HWP, GTW, MUEI, etc) they don't even know what hit them.
5) CPQ is poised to challenge SUNW in the workstation area and high end server. CPQ has a comparable CHIP (Alpha) to compete with SUNW computer, soon SUNW too will become another AAPL. And for the other player (DELL, MUEI, GTW) Merced is still in the drawing board.
So don't be too harsh on CPQ. It is true that with the DEC aquisition CPQ fundamentals becomes rather foggy, but under that fog Herr Pfeifer is preparing his Blitzkrieg, before we know it we are already in Paris (Price target for CPQ $62 by July 1998). Just pray that those DELL, IBM, HWP, SUNW, GTW, MUEI shareholders can go to Dunkirk in time to save their money.
Good Luck to You ALL
God Blessed |
