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To: Greg h2o who wrote (20113)	4/6/2000 4:40:00 PM
From: Greg h2o	Read Replies (1) \| Respond to of 42804

Personal Capital: The new new rules By R. Scott Raynovich Redherring.com, April 06, 2000 Wow, did the markets ever punish those that do not believe in discipline. Last week, this column examined the potential for a serious correction and what you might do about it. We had no idea it would come that quickly. At some point last fall, before the Nasdaq Composite Index started a blistering run in which it doubled within a period of eight months, somebody decided to throw the rules out the window. Moving averages? Hah, who cares about those. Valuations in line with growth? Nah, forget about it. Profit-taking? Let it ride, baby. We all became careless and greedy. Eventually, the markets became impatient with such recklessness. The market needs rules -- and if you don't supply them it starts making its own. The Nasdaq Composite is still up more than 90 percent since January 1998, so we have by no means returned to safety. But you might start deploying some excess cash into leading companies that have had their wings clipped a bit. Let's just face it: things got a little out of hand for a while. REALITY BITES The brutal reality of the combined 10 percent decline on Monday and Tuesday reminded us that there is a need to return to some rules -- the new new rules. Let's keep things in control this time. Let's be reasonable about this. Let's regroup and regain our sanity. Here are the new new rules: 1.The weak are toast. Are you meek in soul, poorly capitalized, or unreasonably leveraged? Can't handle volatility? If these attributes apply to you as either an investor or a businessperson, forget about it. Get a day job. Buy treasuries. 2.Every company is a startup. A great company is only great on the day it announces a great quarter. The day after its earnings announcement, it's a startup again. 3.A company that has never shown a profit should never be valued over $20 billion. 4.Avoid companies in which the executives regularly brag about their market capitalizations and implore the public to buy more of their stock. Especially if these companies are breaking some of the other rules. 5.The $5 billion/$100 million rule: companies with less than $100 million in projected annual revenues are not allowed to have a market capitalization of more than $5 billion. This, of course, requires more analysis of the growth rates, but enforcement of this rule maintains a bare minimum sanity level for the general growth paths of technology companies. It also provides a disciplinary framework for taking profits. 6.Real technology markets matter. Examine the company. Invest in companies that are real technology innovators with rich customers. Is the company supplying complicated, proprietary networking gear to deep-pocketed telecommunications vendors or is it experimenting with avant-garde business models for selling beauty products over the Web? If it's the latter, it's in trouble. There is opportunity in the stocks that are now operating within the rules. As we sift through the companies that we've been following in this column and apply the new new rules to them, a few names emerge. NETWORKING NEWS First up, the networking hardware sector. Some of these stocks are down 50 to 100 percent in the last three months. With strict adherence to rule No. 6, this is the first sector in which to jump back. Extreme Networks (Nasdaq: EXTR), of all the networking players, appears to be living most strictly within the rules. The company is now profitable and headed toward a $200 million sales year. Its market capitalization is $3.8 billion, which seems relatively sane and fits comfortably within rule No. 5, even though its sales are double the $100 million needed for compliance. In recently turning profitable, Redback Networks (Nasdaq: RBAK) now is operating within the rules and its share price has been brought back to earth. The company surprised everybody by turning profitable within months after turning public. Sycamore Networks (Nasdaq: SCMR) was breaking rule No. 3 before last month, but it is now just barely playing within the rules after having $100 chopped off its share price. It also recently turned out its first profitable quarter. Sycamore's position as an early mover in the optical space may explain its premium in the market. Cacheflow (Nasdaq: CFLO), a recent IPO, is in a monster of a market -- Internet performance hardware -- and the company recently cut an interesting deal with Akamai (Nasdaq: AKAM). Cacheflow stock broke rule No. 5 and was punished for it. The stock now is trading almost at half its all-time high. Its market capitalization is a manageable $3.5 billion, bringing it within the rules. Not a bad buying opportunity. The valuations in certain networking companies still raise caution flags. Juniper Networks (Nasdaq: JNPR), for example, is still breaking rule No. 3, with a nerve-racking valuation of $35 billion. If you own a basket of the networking stocks, you can afford to toss some Juniper in on a whim, but if you are looking for one safe bet in the sector, forget about it.