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Strategies & Market Trends : Electronic Contract Manufacture (ECM) Sector -- Ignore unavailable to you. Want to Upgrade?

To: kolo55 who wrote (2063)	5/10/1999 7:12:00 PM
From: MGV	Respond to of 2542

It is wise to be wary of anyone who feels that he must tell you that he knows more than you. That said, you might want to sit in a quiet room and reread Covey. I will assume you are mistake-prone rather than deliberately trying to mislead when you make the following errors: 1. I'm still way ahead of a net long position in CLS begun when we first crossed posts on FLEX/CLS relative valuations (when FLEX was 34, and CLS was 27.50). I posted here on FLEX and CLS on 3/15. FLEX closed on 3/15 at 44 15/16 after trading in a day range of 42 and 45 1/4. CLS closed at 27 13/16 after trading a a range of 27 7/16 and 27 7/8. Do your calculations based on the verifiable facts. You will find that the CLS position has far outperformed FLEX, even after today. 2. And the position is hedged. The transaction is a textbook example of an atrocious hedge. Understand positive and negative correlation. Then understand why a good hedge is constructed with assets that are negatively correlated. Then understand why CLS and FLEX are positively correlated. 3. I also concluded that FLEX should trade at a premium of 30-50% on a share price basis, because of CLS's historically poor return on equity (ROE), and return on assets (ROA). You are missing a fundamental piece of information. The error could be fatal to your trades over time. Try quantifying premiums and discounts on the basis of apples to apples such as Price to Sales and/or Price to Cash Flow. An ROE that is 30% better does not necessarily lead to a share price that is 30% higher. There are so many things you are missing in trying to make such a valuation. Things such as # of shares and therefore market cap., leverage, asset turnover. 4. The neat thing about a pair trade, is the cash from the short sale pays for the long purchase. Try as you might, you can't escape the fact that the trade was a poor hedge. The trade would have been less expensive as a simple margin trade with a long FLEX position. The poor hedge cost you more money. And this is true after only three days with a sharp price rise in FLEX on th eday you choose to "cover." Track this trade longer and it will be a larger loser. There are a number of other misstatements in addition to the above four. Understand also that I am not criticizing either the concept of a pair trade, hedging or saying that FLEX is a bad company or investment and CLS is a good one. I think they both are good companies and investments. The problem here is the explanation and the flawed example of a good pair trade, a good hedge and how to value companies within a sector. Here is one more - 5. Note that FLEX is earning at least 25% more than CLS per share. The error here is in not comparing apples to apples. The better comparison would be with cash flow due to the high goodwill amortization (noncash charge) that CLS has due to substantial recent acquisitions. The acquisitive record of CLS also explains in part the lower ROE and why margins are improving quickly as the management integrates the acquisitions. You don't understand CLS very well and you apparently understand corporate finance even less.

To: kolo55 who wrote (2063)	5/10/1999 8:29:00 PM
From: MGV	Read Replies (1) \| Respond to of 2542

I posted on this last Wednesday, when CLS was trading at 38 1/4, while FLEX was trading at 44. For the record here are pertinent portions of your post on 5/5. They are not consistent with what you allege after the fact: But I think the best course is to hold buying power now, and wait for one of the quarterly sell-offs we seem to get. In fact, if FLEX tries to drop below 40, I consider it a preferable buy to SCI at 38-40, especially so for the long term. No evidence of a short in this message, in fact, just the opposite. You advocate waiting for FLEX to drop below 40 to go long. The EMS stock you compare unfavorably to FLEX is SCI. Later the same day you change your mind and allege a short transaction but, you fail to pin it down as CLS when it would have been logical for you to do so, if you had shorted CLS. This ambiguity, not the transaction, was your hedge. Today, I did buy FLEX at 44, and I did short one of the EMS stocks as a pair trade. Right now CLS is a prime candidate to short versus FLEX. Despite your protestations, your after the fact account is not credible. You had every opportunity to identify CLS as the EMS stock that you allegedly shorted. It is revealing that you did not. It is only today that you identify CLS retroactively as the alleged short. Now that you are on record, let's track the trade from this point.