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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: chmang who wrote (35819)	12/1/2000 11:51:04 AM
From: Dr. Id	Respond to of 54805

This was posted on the old porch, but bears reposting here: December 1, 2000 Views from the Valley Late last year we were asked by a client for a theme to describe the year 2000. We stated that in all likelihood, Y2K would be "The Year of Confusion." Given the behavior of security prices on Wall Street over the past year, our call looks like a pretty good one. Recently, we came across a series of interviews with several prominent CEOs in the information technology sector that highlight just how confusing a year it has been. Andy Grove, chairman of Intel, noted recently that business conditions have not changed much over the past year. Rather, it's the mood of investors that has changed, and their mood makes a huge difference if you're missing expectations by a penny, or if your growth is merely 90% a year vs. 120% a year. They magnify the differences and punish stocks that don't meet their high expectations. According to Grove, investors are in a moody state of mind. Either the glass is seen as half full or half empty no matter what the analysts write and no matter what the companies do. Grove believes the whole technology industry has been aggregated into something more monolithic than it really is. In reality, says Grove, the information technology is humongous. Inside the different sectors some companies gain and some companies lose. One would think that investment analysis would look at not only sector fundamentals but also company fundamentals. Instead, investors are overly concerned with whether the Nasdaq is up today or down today. Grove notes that the e-business revolution is proceeding faster and deeper and more substantially and strategically than any of us would have anticipated a year or two ago. In sum, he continues to see huge opportunities for his company down the road. Meanwhile, Cisco Systems CEO John Chambers notes that their latest quarterly results showed accelerating growth. His problems still are with managing fast growth. Chambers notes that the shakeout in the dot-com sectors has hurt the firm, but it has been offset by an increase in sales from their enterprise (i.e., e-business) customers. Also, geographically, when one piece weakens, other stronger pieces make up for it. As for the Wall Street analysts, Chambers points out that the mood now is to ignore the nine positive things and focus on the one area of concern (just the opposite of last year!). For Cisco, that was inventories. Chambers wants to reduce inventory because he wants to reduce the cycle time to Cisco's customers. That's it (in other words, it's not a demand/supply issue, which appears to be the Street's interpretation). Chambers says that the current environment reminds him of four years ago when Cisco was bunched together with Bay Networks, Synoptics, Newbridge Networks, and Fore. Twelve to 18 months later, Cisco had broken away. That's what Chambers is looking to do now by moving headlong into Internet Protocol networking. One other interesting view comes from, Henry Nicholas, CEO of Broadcom. Nicholas has watched the valuation of his company shrink dramatically in the past two months (although from a very high level). He notes that none of the company's fundamentals has changed in the last few months. He rejects the idea that inventory corrections at networking and cable companies will hurt Broadcom's business, saying that such concerns over overblown. Nicholas notes that Moore's law will either be your friend or your enemy. He said the company is having an ever-easier time getting its chips designed into new products. In sum, he remains just as confident in the long-term outlook. Having said all this, Nicholas said it's a little frustrating to see his stock price cut in half when nothing has changed fundamentally. One other interesting view comes from Silicon Valley marketing guru and resident genius Regis McKenna. McKenna notes that the peak of every up cycle in technology exceeds the peak of the previous cycle. He's a long-term investor (a hugely successful long-term investor) and he believes the long-term prospects of Silicon Valley are strong. McKenna notes that companies are not going to be able to survive in business on this planet without it. The application of the network to business productivity on a global basis is just essential. McKenna points out that some sense has come back into the marketplace over the past year. Still, he believes (as do we) that we're going to see continued volatility in stocks for a long time. Real-time technologies have created this instant expectation of a quick buck. He doesn't think that's going to go away. It's going to be extremely difficult for businesses in the future to maintain stable valuations--very difficult. For what it worth, our own view is that the divergence in perspectives between Wall Street and the Valley will dissipate over time. Wall Street cannot revoke the laws of quantum physics, information theory, Moore's law and Metcalfe's law. That said, McKenna's counsel about a real-time environment and high volatility rings very true to us. Our advice is the same as it was last year: Continue to play the Gorilla Game. Over time, the winners (i.e., the gorillas) will emerge from the pack and compound interest will work it's magic. Steve Waite and Max Jacobs""