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Technology Stocks : Deswell Industries (DSWL) -- Ignore unavailable to you. Want to Upgrade?

To: j rector who wrote (652)	4/16/1998 11:37:00 AM
From: kolo55	Read Replies (2) \| Respond to of 1418

You got my point exactly. What is the probability that margins will shrink? Seems to me that an assumption of shrinking margins is already built into the stock price at this point. As Paul said,if margins don't shrink, stock is undervalued. If margins do shrink alot, stock is fairly valued. Reminds me of a story I once heard about George Soros. Soros won't invest (or speculate) until he has identified the bear case. He's adamant about identifying the downside cases and factors, almost fanatical. I guess the theory is that there must be some reason why investors aren't buying the stock; if there weren't, the stock would go up. (And don't fool yourself, investors know this stock exists. Any screen based on PE will have this stock pop right up.) So it is important to understand why investors aren't buying the "story" we stockholders have bought. Basically, I see the downside factors as: 1. Asian flu concerns and HK currency concerns. I think the discussion on the thread has eliminated out number 1 as a legitimate concern, but it could still be a psychological factor. 2. Historical PEs of HK stocks run around 8-9. I haven't seen much discussion or comparison with other Chinese stocks. I think the comparison isn't necessarily valid because of Deswell's capital structure (NASDAQ listing), reporting standards (US GAAP), financial holdings (mostly USDs), sales denominated in USDs, Deswell's technical competance (required for entry into this business), and business ties with Behringer, a German company. 3. A risk factor for possible overseas financial reporting shenanigans. I don't think this is a legitimate concern, but still could be a psychological factor. 4. A concern that the company's margins will deteriorate as competition moves in. This is a legitimate concern, but I believe that the effects will take years to work out, and will be telegraphed well in advance. In other words, the margins should come down, but it probably will be over a five year period, at least. So in essence, the growth of Deswell will more than wipe out any margin shrink. 5. Possible concern over continued growth. Given the spate of recent announcements, growth of at least 30% this year seems to be in the bag. And based on industry and societal trends in Asia, I can't believe that Deswell doesn't have a lot of growth in front of it. I firmly believe that China will replace Japan as the leading consumer electronics manufacturer in the world. Its almost as though we could turn back the clock and buy Sony, NEC or Matsushita(Panasonic) in 1955. (This isn't quite true, because Deswell doesn't have branded products, and a lot of growth in China will be among the international companies, but I think you get my point.) Well, these are the downside factors I see, and why they didn't prevent me from purchasing this stock. The nice thing is that time will help reduce the concerns that appear to be legitimate. Time is on our side. Deswell is my second largest stockholding, and the current price is only 10% above my averaged basis. I plan to hold this one for a long time. (Ron- the reason I haven't been posting is that I've been in Italy for four weeks and in Maryland/Penna for a week on vacation and visiting family. My wife and I had a great time in Italy, especially in Napoli and walking along the Amalfi coast.) Paul