Hi Keith, You're right, the VLSI sale generated more cash than is indicated by the stock screen, but if you note the Stacked Bar Graph, I was coming from behind on the cash side. I'd let the cash reserves go very deeply into the negative.
Going back to 1990, I'd heard of VLSI through a friend who's ability to pick stocks has been pretty good over the years. When I started to investigate, I saw classic over-sold conditions. VLSI had gone out on a limb to build a state of the art fabrication plant in Texas and had hocked themselves to the ears. They had a big convertible bond issue outstanding along with a plant that wasn't finished. Everyone hated the company at the time.
Yet sales of their product would be quite dramatic if they managed to bring the plant on line and somewhere near budget. They had launched a new design method where they provided the design software to their customers and a whole array of "pre-designed" components. Their customers then could "assemble" the pre-designed components to achieve the overall design goals of the large scale integrated circuits. This proved to be a great tool for their customers in bring timely design and production of the parts they needed.
I'd seen the potential of at least a doubling in sales every three to five years heading out into the future. I saw the potential for the same pattern in their book value. It was my assumption that earnings would also follow.
The $50,000 is a bit misleading. First, I didn't invest that much initially. There were some additions along the way of fresh cash. Second, of the initial investment, half of it was to buy their convertible bonds, which were selling at a 30% discount to face value and paying about 12% on current cost. So, I had a total yield of about 6% (12% from the bonds and 0% from the common stock). This paid me for the time period while I waited for AIM and the stock to start growing as I anticipated.
Eventually, when VLSI's stock moved from my starting point (at about $8/share) to about $36, the convertible bonds became quite valuable. I believe I was paid about $120 for them. So, I collected "rent" for several years and then sold the bonds for a $50 capital gain on a $70 purchase price. That's nice!
I took the proceeds and eventually bought more shares of the common stock when it was knocked back into the teens in 1995-1996.
In fact, the stock doubled in sales and book value about twice between 1990 and 1996. Then the company stalled. They'd made a big commitment to Apple Computer for one of their products and had sold quite a bit of initial inventory. The product flopped BIG TIME and those sales $$$ never recurred.
At about the same time, VLSI made a move to get involved in producing chips for portable phones. This proved to be much more valuable than the Apple contract could have ever been. The stock once again rose from the low teens to the high $20s. Their biggest customer was Ericsson Telephones.
Along comes the Asian Flu and VLSI was taken to task again. Nobody was ever going to buy a phone again. In fact we were all going to pull the chips out of everything we own and grind them up for beach sand! Well, yes it was severe, but we seem to have muddled through it.
VLSI was on a good track to get sales, earnings and book value back on track. They had signed another major portable phone supplier, moved close to a "single chip" design for those devices and had Ericsson's business recovering quickly. All the time they'd been investing in their plant and equipment. This year they were moving from a 6" wafer fab. to 8" in the same plant. They also closed and sold their old Silicon Valley plant. Other changes occurred as well.
Much has been made of the CEO's rather large ego and whether the company was being run by EGOnomics or Economics. I will say that I was in constant re-evaluation of my activity with VLSI from the time Mr. Stein started his Personal PERK Program. When a company is not making money, I don't like to see fat salary and bonus plans on the proxy. I don't like to see fancy annual reports either. (I never did like VLSI's format)
Sorry I didn't get this review up for your Thursday Night meeting. Hope you can distribute it to them. Whenever I'm searching for a new equity, I'm looking for good growth potential for long term periods. I know that rapidly growing companies will have uneven earnings reports quarter to quarter, and of course that's exactly on what AIM feeds! So, AIM makes me money as the company goes through growing pains and once it stabilizes, I continue to have more consistent growth if with less volatility.
I seriously reviewed Microsoft at the same time I was looking at VLSI. The field of software was littered with corpses of "hopefuls" and MSFT had been rocky itself. If IBM burped, MSFT survived, if IBM farted, MSFT was dead (and don't forget INTC's involvement, it could have died and MSFT was a historical footnote also). I understand intellectual property. However, my background is in heavy industry and manufacturing. I tend to lean on plants and equipment more than latest crazes. That's why I didn't go with Bill Gates at the time and probably why I've avoided the internet stocks as well. As you can see, I don't always make the best decisions! However, AIM usually saves my butt anyway!
If we want to set our goals very high, we must expect that there will be some time element involved in achieving those goals. It's not often we get the chance to understand a company's business well enough to be able to make, for instance, 100 times our initial investment. Further, rarely is the path from 1 to 100 a straight, constant slope. It is my intention to find companies that will eventually return $100 for every $1 invested and use AIM to manage the "formative" period.
As with VLSI, the stock cycled between about $7 and $12 several times before breaking out into the high teens. Then is fiddled around in a different zone of prices. I fully expected to see an independent VLSI rise back into the $30s within another year or so. I would have preferred the option of accepting shares instead of cash, as that can ease the tax burden, but that wasn't the case here.
I'll most likely take a significant portion of the total value derived from the VLSI sale and buy more income producing assets. Then it's a matter of seeing if there's anything I'd prefer to buy over and above what I already have in my portfolio. If I can't find anything better, I'll probably concentrate the remaining $$$ into one or two of the stocks I already own.
Part of the reason I'm not hunting for new investments is that I already have way too many stocks - in my opinion. AIM's conservative enough that I don't need significant diversity. Besides, my mutual funds bring diversity enough. I'm always looking for trends first. Then I look for investment potential within those trends. I still at this time think that telecommunications in many forms is the single biggest wave to ride. Whether its filling out the spectrum of transmission, portable phones, devices that D/L the transmitted data or something else related to the explosion of data available and how to access it and filter it, this trend isn't going away any time soon.
Hope this helps,
Tom |
