Each time I review my game plan for the market, I assume I am wrong. I regularly imagine developments evolving in the opposite direction from my expectations. Success takes care of itself. Superb money management occurs when things go wrong, yet action can be taken because adversity has been anticipated.
I also assume I am wrong when I select specific turnaround companies to invest in. That's why my paramount concern is finding companies that are so undervalued that if I'm wrong -- and the business does not turn around -- I can exit the position with a minimal loss, if any.
When I post a new recommendation on
, it is only after roughly 90% of my research effort has been devoted to examining the downside risk of that position. But with each selection, I'm not much concerned about upside. I concentrate on isolating the variables in each company's equation that could cause the turnaround effort to fail and how that would affect the stock price.
Part of my game plan for 2001 is that I expect technology will be down for the year, possibly down more than 10%. It is fine with me if I am wrong, since I am not short tech and because I am already invested in high-quality turnaround companies with more potential, in my opinion, than any group of technology stocks.
Maybe I will miss a big rebound in technology. Great investing is not about taking advantage of each opportunity that the market presents -- it's about picking your spots. It's not about frequent bets. It's about betting infrequently -- and loading up when the odds are heavily in your favor.
The incongruity of this bear market in tech is alarming. At this point in the game, tech stocks should be screaming bargains, with so many of them down more than 50% from their highs. But as I pick apart the fundamentals of tech companies, I am not finding much in the bargain bin.
For me, the lack of undervaluation in tech is a testament to how far prices diverged from reality in the tech bubble from 1998 to 2000. Unwinding the excess is a process that will take time, with intermittent rallies that encourage, followed by declines that frustrate.
Oracle vs. Office Depot -- It's About Leverage, Baby!
When I compare
, I am fully aware that Oracle is a vastly better company, with wonderful products and a terrific future. But I don't risk my capital on companies because they are "wonderful" or "terrific." I invest to make money, and I invest only when I find a large divergence between a company's stock price and the underlying reality of the business. Let's take a look at a simple breakdown of Oracle and Office Depot:
I have to have an edge when I place a bet or I won't play. Oracle is enjoying peak net profit margins, a high
price-to-earnings ratio, with strong sales projected in the midst of a slowdown in the economy. I can't find any significant lever that will let Oracle justify a much higher stock price, but I can identify many potential pitfalls for investors in this fine company.
For example, Oracle was consistently valued at 30 times earnings from 1992 to 1999, before last year's tech bubble generated a new paradigm of valuation. To the extent Oracle is revalued at its historical norm of 30 times earnings, the stock is worth about $15 a share.
Office Depot, one of my picks in my column
Top-10 Turnaround Candidates for 2001, and still one of my favorites, has several financial levers that can propel the stock price upward. For example, a return to the historical norm of 3% net profit margins implies a 50% increase in profits. Or, a higher P/E, given its solid prospects, of say, 15 times earnings, would translate into a nicely higher stock price.
And what if I am wrong about Office Depot? What if it will not turn around in 2001, or if it takes longer than anticipated? The strong balance sheet, enthusiastic insider buying, number one position in the category and depressed stock price suggest to me that I can exit the position with a minimal loss, if any.
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin was long Office Depot, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to