Getch, that was a very nice reminder of the kind of people who purport to be analysts.
Here is a portion of comments in my newsletter to my own investment clients:
MANIPULATION
June 15, 2000
WHAT DRIVES stock prices? In theory, markets react to any news that affects investor expectations of future performance - an example of the so-called "free market" at work. It doesn't always work that way, however, as shown in the case of more than 100 indictments announced yesterday for securities fraud, racketeering, and manipulation of prices of smaller stocks that trade only in a limited market.
"LIMITED" is the key word describing imperfect markets, which are the norm rather than the exception when it comes to stocks. A perfect free market requires numerous buyers and sellers, individual transactions small enough such that no single transaction affects trading price, unrestricted entry into the marketplace, and UNLIMITED access to timely and accurate information. Smaller stocks, often called penny stocks, typically trade lightly and are exempt from many reporting and disclosure requirements for larger stocks, giving rise to abuses in the market system and often heavy losses for unwary investors. Distortions in the functioning of the markets, caused often by lack of information or intentionally misleading information, are not confined to smaller stocks, as seen in current trading of QUALCOMM.
UNUSUAL ACTIVITY in QUALCOMM shares began yesterday afternoon, shortly after a QUALCOMM official had spoken to analysts at a conference held by a well known investment firm. The firm promptly issued an announcement, reducing its earnings estimates, based on a Korean government ban on discounting the prices of cellular handsets, plus a comment on slower than expected growth in the number of subscribers for GLOBALSTAR satellite communication services. QUALCOMM owns about 6 percent of GSTRF and makes most of the handsets. QCOM shares, which had traded above 80 earlier in the day, reached 70 by the market close. Before the markets opened this morning, another major firm downgraded the shares, citing the same information mentioned above, but adding a target price of 50. By mid morning, QCOM shares were near 60, a drop of 25 percent in less than a day. Volume was so heavy that first hour trading exceeded the daily average of 23,000,000 shares. What's going on? Is this a manipulation?
THE KEY to heavy selling was the mention of a target price of 50. To understand whether such a figure is reasonable or is, in fact, intended to drive down the price to a point where savvy institutional investors can pick up a bargain, requires a little study. If pessimistic analysts are correct, a price of 50 indicates a price-earnings ratio of roughly 46 on reduced earnings for this year, which in turn suggests earnings growth around 35 percent. In fact, even with reduced earnings, the actual growth rate is closer to 70 percent, justifying a higher price-earnings ratio, (above 100) but ONLY if investors can expect continuing high growth. Let's look a little more closely. The Korean ban on discounting comes at a time when the cellular phone market in Korea has almost reached saturation. Almost everybody uses a cell phone, and all the phones are CDMA, making Korea the largest single market for QUALCOMM CDMA phones, with more subscribers than currently use the entire domestic services of SPRINT PCS and Verizon, the combined service from BELL ATLANTIC, VODAFONE, and PRIMECO. A saturated market by definition means fewer initial sales and more replacement sales, which typically aren't discounted anyway. The largest Korean company making cell phones is SAMSUNG, and most of its handsets go to the U.S., Japan, and several other countries in Asia and Latin America. Royalties from those sales are increasing rapidly because of the rapid increase in subscribers. So the notion that the Korean ban would seriously affect the royalty stream going to QUALCOMM is simply wrong.
THE GLOBALSTAR pessimism comes from a statement of the Chief Financial Officer at QUALCOMM, noting that subscriber growth was slower than expected. Several analysts argue that the reason for slower growth is (1) bad publicity from the failed Iridium satellite service, which was expensive and had terrible sound quality, and (2) wider availability of cellular phones, making the Cadillac style service provided by the Globalstar technology largely unnecessary. The advantages of Globalstar, however, outweigh these factors. First, it is a very secure system, attractive to corporate executives, journalists, and military in countries with little or no communications infrastructure. Second, it works virtually anywhere, making it useful in remote areas where no other service is available. Third, its arrangement for uniform billings to subscribers simplifies accounting and enhances its attractiveness. The pessimistic analysts see a loss of about $0.10 earnings per share of QCOM if Globalstar goes broke. If Globalstar simply does poorly for the next year, at some point QUALCOMM will have to account for its holdings at the lower of cost or market value. In the short term, an adjustment, even if it occurs, is much less than $0.10, leading one to conclude that pessimistic predictions here are simply wrong, and again suggesting that some other motivation may be at stake here.
WHAT IS KNOWN is that a decision on whether to use QUALCOMM's 3rd generation technology in China, or the European's adaptation of that technology in China, is causing a lot of strife and mischief. The European companies are trying to sell what they believe is the future world standard, compatible with GSM, which already has most of the market in Europe and China. They are playing down the fact that their technology would generate royalties for QUALCOMM, would require replacing existing GSM handsets, would require far more base stations, and in the end would be slower and more costly than the competing CDMA2000. It is impossible to predict which system eventually will be adopted, other than to state with almost 100 percent certainty that it will use some CDMA intellectual property belonging to QUALCOMM. Thus, it is impossible to predict in the short run where QCOM shares will head, but the long term prognosis remains as good as when the stock was selling at triple its current price earlier this year.
INVESTORS may wish to accumulate more QUALCOMM shares for long term appreciation. Another alternative is to consider the purchase of a long term call option, known as a LEAP. With the current share price near 62, a LEAP with a striking price of 70 and expiration date of January, 2002 can be purchased for about 23. If the call is held until expiration, the holder breaks even only if the stock reaches at least 93, or 23 points above the striking price. For a company growing at even the reduced levels predicted by the pessimists, this call does not seem to have the usual risk one associates with options. Its low price is the result of near panic selling, symptomatic of concerted efforts to manipulate QCOM shares either for economic or political gain. NOTE: Those who have never purchased options need to be aware of the additional risks of purchasing what is basically a wasting asset. Brokers will not purchase options for a customer unless the customer signs a statement acknowledging this extra risk.
Art Bechhoefer, Director
Independent Investors Forum |
