I hope this helps clarify my argument.
It pretty much was clarified in the same manner last time around. Just as we discussed last time around, you have hope and reason to believe that some sort of morphing is possibly taking place to create the development of something much more attractive than the normal 'king' position in a royalty game. You want to leave the door open for the possibility that perhaps something in that development will create even more than a royalty game. Nobody on this board is going to argue that value chains of substantial strength exist or do not exist within a royalty game structure. They do.
Likewise, the same could be said within the structure of what we call the godzilla game. Strong value chains have formed. The term godzilla came from the first edition of the manual in which the term gorilla-king was being used to address the model of an AOL or a Yahoo!. Now the introduction of the term kingilla.
I consider the acquisition strategy going on at JDS Uniphase as a normal course of action which certainly a company like Cisco continues to demonstrate well. Yet, Cisco began with their primary product in a gorilla game and emerged as the de facto standard in the router world. Then they 'morphed' around that into a 'gorilling' <ggg> where a large portion of their business participates in royalty games. In spite of the strength of the value chain for those royalty games, competition remains. As has been demonstrated over the past week or two on this thread, competition remains for other dominant companies - be it Intel, Microsoft or Oracle.
It's a natural that JDS Uniphase is doing everything they can do to build the protective moat and assemble the offensive and defensive power they need to navigate their way through the fiber tornado. I was simply amazed with the latest quarterly report with the amount of nimble growth such a large company is experiencing. Absolutely outstanding. If one had played a basket approach of owning many of the companies in the space before consolidation began to take place, I think the strategy has and is paying off with a handsome advantage. Certainly something the authors of the book can be proud they taught us.
Going back to the argument of exactly what is JDS Uniphase growing into we have the comments by Geoff Moore made earlier this year which caused much debate.
moneycentral.msn.com
We have plenty that have applied the criteria and previously come up with the end result of king. On the other hand, we have plenty of challenge to a company like Intel which has been under the label of gorilla by our authors. We could certainly apply the challenge to a majority of Cisco's business outside their gorilla product and contemplate the core and edge product category challenge from other companies for next generation networks. I think we have other clues that can help us determine the strength of a technology company.
As you have learned in the seminar, in spite of all of that 'challenge' and thought, the fundamental metrics at companies like Intel, Cisco, Oracle, JDS Uniphase, Yahoo! and EMC are pretty darn compelling reasons for investment in any of them. They also represent a diverse cross section of segments within technology. We could argue pros and cons of each of those companies using strict gorilla game criteria. It won't change the numbers they are reporting every quarter. I do think that many on this board got a little 'royalty game' shy from the PC OEM royalty game. Especially with the returns that a company like Dell Computer gave us until February of 1999. I would hasten to add that Dell Computer and all PC OEM's are a different business model than any of the other stocks mentioned in this paragraph. The PC OEM's never put up the type of metrics that the six companies of Yahoo!, Cisco, Intel, EMC, Oracle and JDS Uniphase have put up. What does that say about their strength? Is there a correlation between the underlying fundamental strength of these companies and their respective dominant positions and value chains? You better believe it.
We can certainly make the case much easier for holding a business model like Dell 'lightly' than we can for any of the six others that I highlight. It's all in the numbers and Dell never had them to the power that these six do. (I'm leaving out Microsoft on purpose - although for the sake of metrics it belongs in the group.) Yes, Dell had good numbers as an investment, but not even in the same league. This element should have been addressed more in the manual when they discussed royalty games vs. gorilla games. Some royalty games do have higher margins than others which changes the scope enough to consider serious investment. PC OEM's have never had compelling net margins when compared to other royalty games. The PC technology adoption life cycle growth wave was good to companies and investors. No doubt that some of the lower margin value chain members were some of the most handsome portfolio additions during the 80's and the 90's.
Many have asked about my use of 'age' for diversification within in technology. Obviously it takes a few years for a young company to start to match the type of numbers that we have been discussing in the Fool's seminar. However, Brocade, Siebel and i2 all meet the numbers below.
• Sales growth of at least 10%
• Gross margins of at least 50%
• Net profit margins of 7% or greater (discussion is taking place to raise this to 10% or higher)
• Cash no less than 1.5x total debt
• Foolish Flow Ratio below 1.25
• Cash King Margin of at Least 10%
Brocade's last quarter and the two software companies met the criteria this quarter. I consider all three of them 'young' in terms of 'age' within my portfolio and certainly none of them are 'secrets' any more. The above criteria was 'reserved' for a strategy that required a minimum of $1 Billion in annual revenues. Siebel and i2 are crossing that threshold. Brocade has another year or two to go. Each of those three young companies have competitors in their respective games that do not meet the numbers. I also own young companies that do not meet all of the above Rule Maker criteria yet.
However, in my opinion, one has to be careful not to mix the strategies when choosing investments. Very few young companies fly off the IPO shelf and meet the criteria above let alone the $1 Billion revenue mark. Brocade was a real exception and did their IPO like it should be done - when the company was ready and about to turn a profit. Foundry was another one that waited until they were 'ready'. No need to mention that risk increases for owning younger companies, but here lies the core of gorilla gaming and where the basket approach with eventual consolidation fits.
As we all know and have discussed on this board, the basket approach is not a strategy for all. I'm certainly not going to sell all of my more mature companies like Cisco and Intel to pump into the younger candidates. As Uncle Frank pointed out, I have my eye on capital preservation as well as appreciation. Many have joked about the number of different investments it takes to play a few basket games as well. If there is another way to play a basket, I've tried. I even limit my selections to weed out what I feel is the 'weakest' candidate(s) from the get go. So instead of holding three or four, I may only hold one or two in a basket after completing my research and making a 'judgement' call.
When mixing the 'age' of the gorillas and gorilla games I feel that my diversity covers the preservation as well as appreciation angles quite well. No rocket science here, simply combining a tier strategy of growth, performance and age. It probably comes from my 'old days' when I was really a small-cap nut. Let's face it, even though Intel, Cisco, Oracle and EMC are 'older' companies - they are still great investments with plenty of appreciation going forward as long as one allows the most important part of the equation to play out - time. Yet, as great as these investments are, I feel I need to have a portion of my portfolio in the aggressive growth spectrum because I'm soon to be 39 with years to go, kids to raise and goals to meet. Obviously, I feel that much of this can be accomplished within the context of high technology gorilla gaming, royalty gaming and godzilla gaming.
I just checked the pie chart at Fidelity to see how my 'age' mix is divided up after Friday's close. This snapshot is only for that given point in time as it changes often depending on what momentum players are chasing what stocks (and who is are isn't getting added to the S&P 500). <ggg>
Largest holding first:
Intel
Qualcomm
JDS Uniphase
Cisco
Siebel
i2
Redback
Brocade
Broadcom
EMC
Then there is that 'other' category that shows up on the pie chart which includes a lot of plum holdings like Ariba, Yahoo!, Foundry, Sycamore, Juniper, Gemstar, Oracle, my non technology stocks and of course Harley Davidson. The pie chart says this portion is 35.7% of my portfolio. What's interesting is how some of the younger companies have moved up the scale in terms of percentage. Part of that was due to my selling of long time positions in Microsoft, Dell and Lucent after Christmas to build up cash and then using a portion of that cash in the fire sale season earlier this year to add more shares to the youthful Redback, Brocade, Broadcom, JDSU, Ariba, Juniper, Sycamore, Foundry and Yahoo!. The other part is the nice appreciation that i2, Siebel, Broadcom, Brocade and Redback have had over the past year which bumped them up the percentage of holding scale.
The 'age' mix includes the more mature Intel, Cisco, Oracle and EMC as core holdings. JDS Uniphase, Siebel, i2 and Brocade add youth with great fundamental metrics to my core holding mix since all four put up great numbers. The rest are a mix of younger companies that I hope through the growth of IP/Broadband will grow into important players that also put up consistent good numbers moving through the tornado. If things work out, I'm hoping this strategy provides preservation as well as appreciation. That was the intended purpose. As I stated here or at the Fool, time will tell if my strategy was the correct move for me. And, as a tortoise, I'm willing to give it all the time it needs to take place - including Qualcomm.
On a side note, my wife and I experienced a rare event yesterday when we were looking at houses. We walked into a house that down to every last detail and thing we were both looking for were there. Everything. We looked at each other and said this is the one. At least I think that's a rare event because we thought we would have to build our own. The only problem, we refuse to pay $365 a square foot no matter how much we liked the house or how much our investments have appreciated. I'll have to research it more, but I would guess we might be able to build the same thing for around $300 a square foot or less in the same area. Be happy you're not house hunting in the Bay Area.
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