Looks like JDSU was a great op today. Did it get away?
Here's a good article from the Motley Fool--apropos to our earlier posts.
Jim
Fool on the Hill
Jan 31, 2000
FOOL ON THE HILL
An Investment Opinion
The Death of Tech?
By Bill Mann
January 31, 2000
Here we are, on the cusp of the big "correction" that many pundits have been calling for, and with it the death of
tech stocks and their mighty valuations.
Pshaw.
No such thing will happen. And even if the market does turn downward for a period of time, there's no rolling back
the sea change that computers, the Internet, and wireless communications have wrought upon our economy. Can't
be done, will not happen. That is one genie that cannot be put back in the bottle.
We're not going to be forsaking our advanced communications or the companies that best make use of (or provide
them) anytime soon. The Luddites who are hoping and praying for the bear market to come and mop up some of
the highest flyers of the last few years miss this one point rather badly. Qualcomm (Nasdaq:QCOM - news) , for
whatever irrational reasons for its run up, is situated on a spot where companies will have to pay them for a service
that consumers demand. No amount of short-term shellacking in the marketplace will take away this fact away. The
basic question is one of valuation of the potential of that technology. Given the rapid change of technology in the
sector, this potential is quite difficult to gauge.
But there can be no question that at some point these industries will make the transition from being the "Rule
Breaking" disruptors of the status quo to being the ones having to protect themselves from the new interlopers.
When this occurs, some of the most beloved companies of today will become irrelevant relics, forgotten detritus on
the slag heap of history. Fools who pretend that this will not happen only heighten the prospect that they will be
holding one of the stones when it sinks. Once upon a time such stalwarts as Wang Laboratories, Hayes
Corporation and Digital were where Broadcom (Nasdaq:BRCM - news) , Nokia (NYSE:NOK - news) , and
JDS Uniphase (Nasdaq:JDSU - news) stand now, with world beating technology and Wall Street dabbing their
feet with rosewater. Something changed, for some reason these companies lost their leads.
How do we determine in advance which companies will fail to make the transition? For starters we could call the
'Psychic Hotline,' but beyond any dependence on soothsaying it remains difficult to predict the future. The future is
a series of events -- which until they actually take place are only predictable in their randomness. But Fools do have
some ability to see into the future, if we choose to focus on the right things. In order to do so, we must ignore the
market prices and concentrate on the underlying businesses and their prospects.
We also need to blow up a simple generalization made by Wall Street. The appellation of "tech stock" is completely
dismissive to the fact that companies do not move as a united front. This does a grave disservice to investors, who,
in seeking to invest in "tech stocks," may in fact go chasing companies that have no prospect of future success.
Besides, just what is a "tech" company? How is Amazon.com (Nasdaq:AMZN - news) , a purveyor of books and
other consumer goods, more of a high tech company than USEC (NYSE:USU - news) , the largest producer of
enriched uranium? Because it does business over the Internet? In the 1930s, was every company with its own
telephone a communications company?
But I digress. Ignore share prices and concentrate on the businesses. This is admittedly tough to do, but it is also a
must for successful long-term investing. Although a rising stock price is a nice sign of the health of a business, it is
by no means symptomatic. Sometimes the best companies on the planet can go years without much share price
appreciation. For example, Motorola (NYSE:MOT - news) has increased by 7500% over a 20-ear period, but
did not appreciate at all for the 5 year period between January 1994 and January 1999. And Wal-Mart
(NYSE:WMT - news) , though not a "tech company," went from mid-1991 to mid-1997 without any appreciation
of shareholder value. Is this the sign of a bad company? You tell me, are Motorola and Wal-Mart bad companies,
ones without potential for future profit growth?
All great businesses have times of decline or level share pricing. For the Foolish investor, this should not be the
greatest concern. If a company you have invested in shows trends toward increasing sales, high gross and net
margins, excellent prospects for future growth, a leading and/or increasing portion of the business in its sector, and
good cash management, you've more likely than not got a winner. If you find a business with these attributes and
you buy and hold on through thick and thin, you've already won, regardless of whether the market has chosen to
reward you or not. Market risk only becomes so when you allow fear or greed to overrun principles in making
investment decisions.
The successful long-term investor chooses benchmarks in advance (for example, the Rule Maker or Rule Breaker
criteria), only buys companies that exceeds them, and sells any company holding that violates them. Principled
investing will not make you impervious to mistakes, but it will help you sleep at night, even when the market has
chosen to punish the companies you hold.
The investing public goes through fads, cycles, and even manias. It is very well possible that we are in a mania right
now, as an unheard of level of unprofitable companies have been given significant valuations based upon perceived
prospects of the future. In the end, there is one inviolable rule: companies have to make profits. Companies that are
now given large valuations in spite of operating losses are fundamentally only treated thusly based upon their
potential to become very profitable in the future. Amazon and other maturing Internet companies will not be
allowed to remain unprofitable forever with impunity by the market.
We'll likely only know in hindsight whether or not the current high-flyers of the stock market are in fact
"overvalued." The answer will most certainly be "yes" for some of them, and "not even close" for others. But the
fact is that a new plane for economic expansion has been created, and a certain subset of the companies that are
exploiting the "Internet Territory" will achieve growth levels unseen in previous generations.
Many of the pundits declaring the imminent crash have assumed companies must come back to traditional
valuations. But information technology has allowed inventory levels, work-in-progress timeframes, and payment
cycles to be compressed to a level unheard of even a decade ago. This basic change in economy and the
technology that makes it possible cannot be undone, regardless of the current sentiment of the market, or the cries
of "foul" among economists.
Technology stock "crash." Maybe, but it won't be fatal, and it won't unring the bell of New Economic change.
Fool on!
Bill Mann, TMFOtter on the boards |
