M.M.: Here's where Wynn Quon comes from .....
..... or at least his opinions, anyway. The following is from some
NewsGroup browsing I was doing today. Being relatively new to
Internet edicate, I'm not sure if I am crossing any boundaries by
pasting this here. If this is so, please let me know - and my sincere
apologies to anyone offended.
Carl
Subject: Zitel - short
From: quonw@software.mitel.com (Wynn Quon)
Date: 1996/11/15
Message-Id: <56hrqk$a1i@quonw.software.mitel.com>
Distribution: world
Organization: Mitel. Kanata (Ontario). Canada.
Newsgroups: misc.invest.stocks
At the beginning of the year, I posted about Gandalf and how it was a
good short candidate. Events came to fruition quicker than expected
and Gandalf did a swandive from $20 in May to $3 last month.
When the bloom goes off one tulip, it comes back on another. This
time instead of ISDN, it's the Year 2000 problem. The conventional
wisdom is that it will take billions of dollars to fix and the software
companies in this line of business will shine.
Once again, investors have leapt ahead based upon the thinnest
of business cases, giving some of these companies much more credit
than they deserve.
The best example I can see at the moment is Zitel (ZITL - NASDAQ).
This company makes disk drives. Its core business is old and dependent
on the less-than-robust sales of Unisys mainframes. Its annual sales are
$23M, (unchanged from last year) with a net income of $4M down from
$8M last year.
The twist is that it owns a 33% stake in MatriDigm. MatriDigm claims
to have written a software package that can automate the conversion of
old code and remove all of the Y2000 problems. According to the company,
its product "can convert about one million lines of code an hour". (If
you've ever developed any kind of serious software, you can't help but
smile at this).
The software is not commercially available yet and may not be until
later in 1997.
Despite this, Zitel's stock price has moved up strongly. It is now
at $50. With almost 8 million shares, the company is valued at
$400 million dollars.
Investors seemed to have missed the following points:
* big software houses have been contracted already to fix the major problems
- the lead time for changing and testing ancient software is two to three
years; Zitel/MatriDigm may miss the window entirely
* the software will not be able to meet the hyped-up expectations. Software
technology is simply not up to the level that many of these investors
believe it is.
* the competition for Y2000 projects is intense. When it comes to legacy
systems, businesses will take the conservative way out. Even if a
conventional solution with a known consultant firm is more expensive, it
will still be chosen over a gee-whiz solution that may or may not work.
* In late October, BRC Holdings purchased 7% of MatriDigm for $1.5 Million.
This implies that the *total* value of MatriDigm is $21 million. Zitel
owns a third of this, which comes to $7 million. (ref. Barrons, Oct. 28th)
There appears to be a bit of a discrepancy between this and the $400
million price tag that investors have put on Zitel.
* The stock price two weeks ago was in the low $30s. Then the company
announced a 2-for-1 stock split effective next Monday. Based *solely*
on this, the stock has gone to $50. Note that there has been no news
that changes the underlying value of the company. What we have here
is pure momentum.
Recommendation:
Because of the strength of the momentum, be careful deploying your short
if you choose to do so. As I mentioned in my Gandalf post, these situations
are only for those with deep pockets and steady nerves. There is no
telling when it will top out but a profit of 70%-80% within the next year is
quite reasonable.
p.s. I follow my own advice.
--
Wynn Quon | The greatest of all gifts is the power to
(not speaking for) Mitel Corp. | estimate things at their true worth...
| - La Rochefoucauld, "Reflexions"
|
