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Strategies & Market Trends : The Art of Investing -- Ignore unavailable to you. Want to Upgrade?

To: Waldeen who wrote (184)	10/23/1998 12:50:00 PM
From: Sun Tzu	Read Replies (3) \| Respond to of 10709

First thanks for all the responses. I will check them out and share with you my findings. Now let's get to a few good points raised by Waldeen. Waldeen, you correctly identifiy that at least part of the impetus for moving to small caps is the preception that they've bottomed and are relatively safe. This I think is a bigger plus than you ive it credit. The main reason the super big caps went as high as they did, was that as the market climbed the wall of worry, you had a lot of fully invested bears in the market. These people felt that buying shares of the very big caps gave them the liquidity they needed to get out quickly in case of a crash. In time this changed to "only big caps go up" mentality. However, it seems to me that the fund managers are now realizing that since they all are concentrated in the same big caps, not all of them can exit them in an orderly fashion (which was the reason for buying into the big caps in the first place). In addition, some big caps are experiencing a bigger drop in revenue and earning growth than small caps and all of them are more richly priced than their smaller brethens. All this should shift the psychology in favour of small caps. Many Wall St. strategists agree with me on that. In fact a few days ago I heard one say that the small caps are poised for to outperform for the next 10 years! I am not sure if I agree with that, but the small caps are at their lowest valuations levels ever. After the psychology favours of small caps for a while and this small-cap-phobia disolves, small caps will move based on their growth and earnings prospects as should be the case. As for finding all my requirements in the same company, I've already found one that meets all these requirements and I think there are many more to be found out there. Remember, there are more than 8,000 companies out there and I'm only looking for 8 of them. Here are the requirements: (1) The company should have a strong balance sheet so that it cannot be musceled out if things don't go its way. (2) The company should be dominant or at least very well respected in its industry so that when (a) fund managers think or that industry they think of this company, or (b) they will be part of the consolidation which may take place in that sector. (3) The company should be either poised in an expanding market, or its sector should be overdue for consolidation. (4) The company should be making money and be trading at cheap valuations. Cheap valuations here refer to either PEG and ROI ratios, or the implication that the stock has discounted a sever recession and is trading at itsown relative all time low. (5) The company has the minimum market cap of $150 M. Any thing lower than that and you will lose any chance of institutional investment in there as the liquidity becomes a big issue. (6) The company has a maximum market cap of $800M. This is not as big of an issue as the above items. (7) The stock is in an up trend or at least shows signs of a base. (8) The management is absolutely in love with their company. In all my years I've met only a handful of companies that met this criteria and in every single case that stock proved to be a great winner for years to come, even when odds were stacked against it. Obviously I cannot make this a requirement, but if it exists, I'm willing to lax some of the other requirements. Now the one company I've found that fully meets the first 7 requirements and a bit of the last requirement, is 3Dfx (TDFX). I've mentioned it before and I don't want this thread to turn into a stock pushing contest, so by all means feel free to voice your opposition here. Unlike many, I apreciate a good counter arguement more than an agreement. TDFX trades ~10.5 and has over $6 per share in cash with no debt. They have a market presence of 85% in the add in 3D accelerator market and are widely recognized as the leader in 3D graphics for the home pc market. The company is trading at PE of 7.3 and in each quarter of this year their revenue has exceeded that of their total revenue in previous fiscal year. They have new products and are trying to expand into the corporate market. The 3D graphics market is expected to grow by 30% a year over the next 5 years. There are 35~40 companies in the graphics arena and market research indicates that only ~20 of them are needed. The rest will either go under or consolidate. There are negative factors here as well. Primarily they have to fight some big and entrenched competetion (namely ATI) and have to prove themself in the market. Their margins are high (GM in mid 40s) but that is sure to attract some unwanted attention in an already cut throat market. Their stock is in retail hands that don't know zip about market dynamics and their moody nature makes the stock schizophernic (on the plus side they recieve coverage from 3 of the most prestigeous brokerage houses). But all in all I don't see many negatives. Once again, thanks for the suggestions and I'd appreciate further comments. Sun Tzu P.S Do not expect to double your money in TDFX over a week, rather this is the kind of stock that you have time to research and average up your position over many months (perhaps years). But I'd increase my position in anticipation of the Christmas seasson.