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Technology Stocks : CyberGuard Corp. (CYBG) -- Ignore unavailable to you. Want to Upgrade?

To: uu who wrote (2030)	8/25/1998 9:00:00 AM
From: CMason	Respond to of 2616

Addi -- I was addressing my comments who an individual who said he had three long positions blow up on him in the past year. I've never had that happen to me on a single long position (I've been flayed by a few earnings disappointments, but never had a long position drop on me an announcement like that CYBG made yesterday), so I thought I'd try to help. Sorry you take exception. You seem not to understand that CYBG was obviously a poor choice for a long position well before yesterday's news. Let me give you a few quick "top of mind" thoughts, though I suspect you'll respond with a knee-jerk reaction that I didn't do the analysis and am actually either stupid and lucky, or in cahoots with the devil: 1. Market right now is unfavorable to small caps. Liquidity is the top concern of big money managers, and they're buying the bigs. Barrons had an article on it this week, but it's been obvious from January or earlier that small caps as a class are declining in value. 2. Overall, the market is toppy. Check any index you want to see that. You don't have to be a PhD economist or a gnome to know that stocks are very high relative to historic valuations, Asia continues to tumble, Russia is in meltdown mode, and Latin America is beginning to slide. Even if a company doesn't have any direct exposure to these markets, sentiment is turning pessimistic, which is bad for stocks in general. 3. CYBG is losing money. Check out the earnings release dated 4/29 or the 10-Q dated 5/15. Not only is the company losing money currently, it's lost money for a long time: accumulated deficit through 3Q 98 was $55.6 million. Software is typically a tough business to lose money in; look at MSFT, MANU, or my favorite WIND, to name a few examples. Losing money in a generally profitable business is a signal that something is seriously amiss. How can you claim to have done due diligence and have missed this? I don't buy any companies with negative earnings, and I don't short any companies with positive earnings. This isn't rocket science, just common sense. 4. CYBG is burning cash, with a net outflow from operating activities of $8.1 million in the nine months ending 3/98. Companies that burn cash will eventually need to take on debt or dilute the equity of investors. Cash available at 3/31 was $4.4 million. Again, how could you have missed this? 5. Most of the estimates I've seen indicate CYBG is #3 in its category. I don't know the market dynamics of firewall software, but I know what it's like in consumer package goods, and there are plenty of good academic studies on other industries, which indicate that the odds are you're going to get killed if you're not #1 or #2. CYBG's financials tend to confirm the hypothesis. If you want references on the general theory, I suggest Jack Welch at GE is the best business leader in terms of putting this into practice; on the academic side, you might want to see John Quelch, who used to be at HBS and I believe is now at the London School of Economics. 6. Good companies don't put out press releases which are at best "fluff" and at worst are materially misleading. The 7/22 release "CyberGuard Corporation Joins Microsoft Certified Solution Provider Program" was a transparent attempt to hype the stock; I shorted on 7/23. That's two reasons to short small-cap stocks in general at this time, and four reasons to short CYBG. You claim it's all luck and not research. I have to admit that I didn't see yesterday's announcement coming, but I was already ahead by 40 or so percent on my position before the news. I've lost money on stock trades (although rarely from the short side), but I've always tried to learn from my mistakes. I didn't cause your loss -- CyberGuard and the stock market did. Once you've cooled down, perhaps you can apply this lesson to your investing process. Regards, CMason

To: uu who wrote (2030)	8/25/1998 9:16:00 AM
From: Cosmo Daisey	Respond to of 2616

Addi, Analysis of stocks: """The fact is my friend, you can not possibly make a case against CYBG given the data available to everyone by the company just a few short months ago""" Only the longs listen to the company line. Shorts don't call the company, shorts don't believe any research but their own. Shorts do TEN times more research than the longs. Spend hours pouring over every word in every SEC filings looking for clues. Call the competition and appear to be interested in their stock and ask them about the company you are really looking at. Competitors know what's going on. Track the people on the board of directors and check the other companies they have been involved in, lots of good info here. Look at the quality of the research of the brokers who are recommending the stock. Look at the broker who brought them public. Look at who likes the stock and who doesn't like it. When you have done all that if you still like the stock, buy it. Coz