I know this recent dive is costing some of us a small fortune in paper profits, but it is fascinating to watch the market react to news. I am surprised that so far today the market has put a decidedly positive spin on the 45% increase in INTS product revenues, deciding to ignore the cost problems. It probably believes that the new CFO will quickly restore order, enabling the company to get back on its upward earnings path.
But lets look deeper. Sometime between 12/5/96 and 12/18/96 one of the four analysts following WIND revised the FY 98 EPS estimate from $.83 to $.82. This may well have touched off the initial selling that started a week or so ago. After all, this was the first downward revision for WIND in recent memory, and broke the chain of upward earnings revisions. It also happened too close to the end of the year to be ignored by momentum players.
As the sell-off snow-balled, INTS reported out a poor quarter, but one that can still have a positive spin. This implies that INTS should quickly recover somewhat in price; hence, smart money is selling WIND and buying INTS.
Does any of this make sense? Does the analyst that revised FY 98's EPS by one penny really believe his/her numbers are sensitive to within one penny? The estimates so far this year certainly do not justify anything like that kind of confidence. Lets look at what they are estimating:
For the quarter ending in January, the four analysts estimate EPS ranging from 19 to 21 cents. The actual number should be in the range of 21 to 23 cents. For FY 98, they estimate EPS will be in the range of 78 to 82 cents. That is an incredibly tight range for something that is so difficult to pin down, especially when the correct number is closer to $1.00.
Now, how should we feel about these silly games causing a major price deterioration in the WIND stock. Unless you have overly leveraged yourself, or you were investing for short term gain, it just doesn't matter. No, change that, it does matter, but not in the way you might think. It is important that WIND corrects from time to time, to keep the momentum players from pricing the stock to excess. Excess pricing ultimately causes enormous volatility - that even stalwarts like me will find distasteful.
For WIND, the stock should increase henceforth at about 40% to 50% per year - for many, many years. But without periodic price adjustments, this trend-line cannot be achieved without extreme volatility. This is as true as the fact that a dropped ball must bounce. In other words, it is as much a law of the universe as physical laws.
Why is this true? To prove it, begin by supposing that it isn't true. Suppose that WIND's price consistently increases at about 3 percent a month with almost no volatility. Meanwhile, say WIND continues to report out improving performance slightly above this rate, and of course everybody remains optimistic about the future - and why wouldn't they? What would happen? Every analyst and investor that can work a calculator (that's more than half of them) would realize that the stock can be arbitraged to yield a huge profit. Borrow money at 8.5% or less, and return 40% - with no risk! As time goes buy they all jump in. The price is pushed up until a correction is unavoidable - violating the initial assumption that the price can increase with little or no volatility, proving the assertion. QED.
It is good to see the laws of the universe are not being violated in this crazy market.
Allen |
