<just try and buy survivors>
My approach as well, and I think what the analysts need to remember (as they downgrade after the fact) is that many of the balance sheet clean innovation names are well engaged in severe cost cutting modes that will bring their breakevens down substantially. Then if there is stabilization at these ultra-depressed revenue bases they hit BEs. However if there is some cyclical firming (not a boom or even a new killer application, just some replacement/maintenance, some normal technological advancement, and high payback reinvestment capex that pulls down costs within the existing system), it won't take much to really leverage to good operating profits. At least it's a reasonable theory? And in terms of fundamental valuation it's a free call option right now. The current non-functioning market's panic action is a different story of course.
Even though some companies have been a little slow, it's not exactly like this process just got started last week. Everybody's getting lean. First is the easy part: inventories: that's another reason why second half 02 revenues have collapsed across the board throughout all the innovation sector. Then it's capex/investment toward future campaigns. I think the news from a stalwart like ARMHY illustrates just how extended and advanced even this later process is.
Then simultaneously SG&A: very widespread layoffs, facility shut ins, and then R&D. Depending on the level of prior corporate fat, that can get kind of expensive. It's the last personnel part that has to be of concern, cause you don't want them eating their young. I have an R&D type brother in a small Mass. tech firm that has survived two rounds of layoffs down to 17 people. He just doesn't see how they have the critical mass to get going again. They have excellent dormant tech, but a company like his needs to find a big brother. So we have to be concerned about critical mass.
Competitive position is getting hard for me judge, both because of the noise and static right now (really always the case in tech and innovation), and because I'm not an innovation guru (and judging from the track record of the George Gilders of the world neither is anyone else). I'm willing to generically trust the RHs (and am calling for any other good list of innovators from this thread) of the world for that to at least be in the ballpark. Personally I see the survivors coming back IN STRONGER POSITION as most of the remaining competitive wannabes die, wilt or are absorbed.
Then there's the financial strength filter. For instance, I've looked at a company like Akamai (AKAM). They're is huge bullish divergence in the MACD.
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They have innovative tech that bears a look too: RTW list, and 01 RH. But the balance sheet is stretched, not so much on the current asset and liability side, but on the long term liability side.
biz.yahoo.com
Maybe a good spec, but discretion is the better part of valour on that one, at least for now?
Then there's AMCC, strong innovative technology in a tough sector (communications), terrific balance sheet with 1.05b (3.49 a share)in quick assets. They are working towards 200m/yr breakeven by early 03, but the revs are 120m. So they are burning about 80m a year. Still when you look at their cost structure they have a huge R&D budget of 140m and their SG&A has plenty of downward room.
biz.yahoo.com
If they wanted too they could cut that by a third, be well below BE even at these ultra depressed sales levels and still have a solid innovation campaign in place. And it's an absurdly deep net net @2.53 selling for 762m mkt cap. The problem I'm having with this name and the chipmakers is that the MACD and AD numbers still look quite there:
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Also some of the stalwarts like TXN and INTC still look a bit pricey on a price to sales, balance sheet protection basis. There are still no major bullish divergences showing up there or most chip companies yet (CRUS is an exception and LAVA is one I'll comment on later, INTC's not bad).
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I've gritted my teeth and taken a quarter of a full position on AMCC anyway.
The software companies had sold down severely and have shown significant bullish divergence in the process. Take Red Herring company TIBX for example, but also look at MACD and AD lines on RH's SEBL, BOBJ, and BEAS.
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TIBX is also in great shape financially (really all these companies are)and is not a serious bleeder (7m in the Aug qt) and has leeway in it's cost structure to easily correct that. At 3.47, it has a MC of 722-570 quick assets for a 152m EV. Depressed rev is about 260m for an EV/R of .58. |
