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

To: Bob Rudd who wrote (16248)	1/22/2003 12:27:34 AM
From: Bob Rudd	Read Replies (1) \| Respond to of 78594

OT sort of: On the subject of technology and R&D I read a book on tech investing by Michael Murphy, a fund manager and newsletter writer in the mid-90's. The central theme was that R&D should be considered like earnings since a rational company would not invest in R&D unless the outcome had a favorable expected value. Murphy's theory was that one should look at a multiple of earnings + R&D instead of PE for tech companies. So a company with a pile of R&D but skimpy earnings might be undervalued by the former measure but overvalued by the latter. The R&D componant would capture future prospects. I found this concept intuitively appealing, but before betting any real money on it, I put together a spreadsheet based on what was in the book then looked at what had happened in the 18 months or so since the one in the book had come out. It wasn't pretty. Revisited it a year later - still not pretty. And this was well before tech bear that began 2/2000. The conclusion I came to was that a whole lot of R&D is money down a rat hole, which may partially explain, but doesn't necessarily justify why the proven winners get bid way up.

To: Bob Rudd who wrote (16248)	1/22/2003 10:47:51 AM
From: jeffbas	Respond to of 78594

Bob, I was not recommending LLTC which I agree "looks fairly priced to a bit on the high side", but just using it to make a larger point about technology investing. (XICO has a much better reward/risk, in a much poorer company in the analog mixed-signal area, now run by a former LLTC guy.) As far as Murphy goes I never bought that line about adding R&D to earnings. -For a well-established company a long string of R&D created the current earnings and is necessary to create future earnings. Thus, unless the level of R&D to sales has been increased materially, I see no reason to make any adjustment. -As far as young development stage companies go, his point has some merit. If you could identify the ones which won't fail, then using R&D expense to help anticipate the stream of earnings that will result, is a sensible way to help establish valuation. However, the first step is to establish the ones that will succeed, which is beyond the ability of 95% of folks, and certainly Mr. Murphy. However, I am sympathetic generally to the idea of looking at everything about a company that might make it a better "value" than it might otherwise seem. It often isn't just a strong balance sheet. For example, new management with a lot of options, reasonable salary and a proven track record sometimes turns out to be the most valuable asset a company has.