Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Wallace Rivers who wrote (11314)	10/18/2000 4:30:56 PM
From: Paul Senior	Read Replies (3) \| Respond to of 78613

Yes, now may be a time to diversify away from "pure value". OTOH, just because growth stocks have come down in price and are now a relative value-- that can be a dangerous way to invest. (as pointed out by D. Chisholm, and as you know too.) MSFT might work out very well though - it may have been washed down as far as it's going to drop with today's market fall, and may now be a decent bet to rebound when the market recovers and individuals and institutions look to deploy funds. For me, I've added today to these downtrodden-that-might-recover (I hope): American Airlines (AMR), which is the number 2 carrier, Cemex (CX) which will be the number 3 cement producer, and Dollar Thrifty Auto (DTG), which is the number 3 or 4 auto rental co. I tossed in the towel and will take my losses in AKLM, AVS, ESCC, IGL, VII. (And, as with a prior post - these clunkers too are all in taxable accounts; I'll revisit the stocks in 31 days after I get the tax loss.) Paul.

To: Wallace Rivers who wrote (11314)	10/18/2000 6:49:29 PM
From: Daniel Chisholm	Read Replies (1) \| Respond to of 78613

Hi Wallace, My personal opinion is that if there's a rational argument to be made for an investment, it belongs here (or at least a post or two, before migrating off to a more specific thread if applicable). Obviously you and everyone else here realizes that just because XYZ.com is off 60% from its highs does not mean that it is necessarily cheap. Now MSFT, they sure are interesting to think of in the sense of a value investment. It's not as if any of the following is likely to be news to anyone here, but here are my thoughts on it, and why I have been unable so far to "get it" as a rational investment: They are (excluding stock option compensation) remarkably conservative in their accounting (deferring revs and earnings over a product cycle). I think that their revenues and earnings can be trusted more than most companies out there. They are a very large company now. The law of large numbers makes their future growth more difficult than their past growth (of course there is also the antitrust suit). Their great success was coincident with their stock price soaring over an extended period of time, combined with large stock options grants to their employees. Not only has the cost of compensating these very hard working employees extraordinarily well not been incorporated into the company's historical statement of earnings, it is also hard to predict how the company might perform operationally if their stock price does not continue its exceptional historical growth. If they can't continue to overpay their employees (at little apparent cost), how will their productivity be affected? One could blithely say that this is a coupled system with a bit of positive feedback, and therefore doomed to blow up -- however the correct answer is likely to be subtler than this... They are an "intangible intellectual property" story writ large -- while they are not a (financial) capital intensive industry (and all the hidden long term benefits that that implies - inflation resistance, the possibility of sustainable long term cash flows being greater than accounting earnings, etc), they are very "intellectual capital" intensive. This is a (relatively) new thing, so we analysts might be missing key parts of the long term picture of how the true economy of such a company operates (e.g. is there an equivalent "intellectual capital depreciation" allowance or expense? Perhaps this is what some of the hidden cost of generous stock option wealth transfer to employees actually is?) Back of the envelope, I can't see MSFT being cheap. $270B (indicated, non-diluted) mkt. cap, $23B in sales, $10-ishB in (earnings / cash flow / EBITDA). With margins like this, margin expansion won't give you much. As far as sales growth goes, you just can't grow $23B in sales at a 30% annual rate for very long before the predictions start to look pretty silly. Buying back $12 worth of stock in order to "purchase" $1 of your own sales (and fifty-ish cents of your own earnings) for your remaining stockholders doesn't seem to make much sense either (or if it does, I'm missing the key insight). What I just can't see is that at a mkt. cap of $270B (that's 27X cash flow/earnings/EBITDA), how can this investment ever earn itself out? - Daniel