Interesting article mentioning FFIV, SNDK and Silicon Graphics as short candidates
8/17/99 7:45
How the Stock Market Spent My Summer Vacation: John Dorfman
(John Dorfman is president of Dorfman Investments in Newton,
Massachusetts)
Newton, Massachusetts, Aug. 17 (Bloomberg) -- While I was relaxing at the beach, the major stock-market averages had a
pleasant week, gaining about 2 percent. But as always, the
movement in the averages barely hinted at some of the triumphs
and tragedies in individual stocks.
F5 Networks Inc. shot up 70 percent for the week. The
Seattle company makes software for handling Internet traffic.
Since it started trading on June 4, the stock has risen to $54.44
from $14.88.
A history of operating losses seems to be de rigeur these
days among stocks making a splashy debut. And F5 Networks can
provide that. It lost $1.5 million in fiscal 1997 and $3.7
million in fiscal 1998. In its first quarter as a public company
-- the third quarter, which ended in June -- it lost $1.5 million
on revenue of $7.6 million.
To this cute puppy the stock market has assigned a value of
$1 billion, as of the end of last week. That puts the stock at 33
times annualized revenue. If we assume that revenue will grow 10-
fold and that the company will turn profitable and enjoy a 10
percent profit margin, the stock is now selling at 33 times
earnings in the year ... well, who knows what year.
Of the 15 biggest gainers last week -- among stocks with $1
billion in market value or more -- 10 had the word ``networks,'
the word ``communications' or the expression ``.com' in their
names. It reminds me of the 1960s, when almost any stock with a
name ending in ``onix' was good for a ride. I hope that
investors in today's trendy stocks understand what they are
getting into. But I believe that most of them don't.
SanDisk
Disregarding stocks that made their public debuts this year,
the week's biggest gainer was SanDisk Corp. The Sunnyvale,
California, company makes ``flash' memory devices for computers
-- in other words, ones in which data is stored on memory chips
instead of on disks.
I wonder whether the investors who were snapping up SanDisk
shares last week know or care that insiders have been selling the
stock recently. According to the Washington Service database,
vice president Daniel Auclair sold 31,000 shares in July,
retaining 36,590. Chief Financial Officer Cindy Burgdorf sold
19,004, retaining 10,018. Vice president Sanjay Mehrotra sold
28,176 shares, retaining 30,510. Two directors, another vice
president and Chief Executive Eliyahou Harari also sold some
shares. Harari's sale was insignificant compared to his remaining
holding, however; he owns more than 1 million shares.
Many of the sales were option-related, but I still view them
as negative.
As an inveterate bottom-fisher, I was more interested to see
what had gotten knocked around while I was away. I'm always
looking for stocks that are punished too severely for their
shortcomings and have rebound potential.
Silicon Graphics
Silicon Graphics Inc. was a big loser, down 32 percent. This
stock sold for more than $44 a share in 1995 and was considered a
great company and a terrific stock. Today it languishes at
$11.50, and it is beginning to intrigue me.
The Mountain View, California, company makes computing
systems with advanced three-dimensional graphics, used by
engineers and by Hollywood special-effects wizards, among others.
Most famously, it helped bring to life the dinosaurs in the
``Jurassic Park' movies. It also makes other computer products
and in 1996 purchased Cray Research, a pioneer in supercomputers
that had fallen on hard times. Silicon Graphics was unable to
restore Cray's business and now plans to discard it.
Today, Silicon Graphics itself has fallen on hard times. It
lost $459 million in fiscal 1998. In fiscal 1999, which ended in
June, it had positive net income in total, but negative net
income from continuing operations. The company has posted a loss
in seven of its past nine quarters. Executives who were key to
its early success have left.
Analysts have abandoned hope. The Bloomberg database counts
13 opinions, 12 of which are ``hold' or ``neutral,' a rating
that is often a veiled insult on Wall Street.
Lone Bull
The only bull is Daniel Niles of BancBoston Robertson
Stephens. Remember his name if he's right.
And I suspect he will be right, because some of Silicon
Graphics's numbers still look very good. Its long-term debt was
recently less than 30 percent of stockholders' equity. Its book
value, or stated net worth, is about $7 a share, meaning the
stock sells for only 1.6 times book - very low for a tech stock.
The price is only 0.8 times revenue. I suspect there is enough
value in the company that, if it doesn't right itself, it will be
taken over at a premium.
Another stock down big last week was Hillenbrand Industries
Inc., of Batesville, Indiana, the nation's leading maker of
caskets and a leading seller of hospital supplies, particularly
beds. It fell 25 percent last week and is down more than 44
percent over the past 12 months.
OK, I don't love the funeral industry any more than the next
fellow, and a hospital bed isn't my favorite place to be either.
Still, I think Hillenbrand stock is down to a rather attractive
level -- $31.63 a share, 12 times recent earnings and 14 times
estimated fiscal 1999 earnings. It was only last October that the
stock hit $62.38.
Hospital Sales
The problem with the stock stems from problems in sales of
hospital beds and other health-care products. Those sales have
dipped unexpectedly in the current quarter -- the fiscal third
quarter, which ends in August. Revenue for the quarter may come
in at about $412 million, down from $483 million a year ago.
As best I can tell, the shortfall is the result of five or
six little problems coming together. A major part of the trouble
is that hospitals are being more tight-fisted. The money they get
from the federal government has been trimmed, and they have to
spend a lot on computer systems to get ready for the year 2000.
I wouldn't bet against Hillenbrand for the long term. The
company has increased its earnings in 10 of the past 11 years and
hasn't posted an annual loss during that time. Debt is
reasonable, profitability has traditionally been very good and
the stock's valuations are favorable. The stock price is only 2.3
times book value and about 1.0 times revenue.
The analysts have all fled. There are six ratings in the
Bloomberg database, and all six are ``holds.' But when a stock
is unpopular often turns out to be the best time to buy it.
--John Dorfman (617) 964-2026
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