Skip to main content

Reasons to Be Bullish

SAN FRANCISCO -- Paying homage to the powerful positive that is a more accommodative

Federal Reserve

, I've gone searching for "Reasons to Be Bullish" -- a new column type I plan to make a periodic feature.

Admittedly, this is sort of an unusual pilgrimage for a nonbeliever like myself, but judging from recent action, a lot of folks have already embarked on the journey. Building on last week's gains, major averages ended uniformly higher today (albeit off session highs). The

Dow Jones Industrial Average

rose 0.1%, the

S&P 500

gained 0.8%, and the

Nasdaq Composite

climbed 3.3%.

Still, I'm agnostic, because "the Fed is going to ease, we must buy with impunity" logic crumbles when you consider said buying -- and the accompanying "animal spirits" as

James Cramer

observed, evinced by



12.6% gain or the

Philadelphia Stock Exchange Semiconductor Index's

nearly 7% leap -- makes it

less likely

the Fed will actually ease.

Yes, the economy is slowing/has slowed. But, barring

systemic risk

caused by an

exogenous event

(gotta love the lingo), it's unlikely the Fed will do anything more in the near term than adopt a neutral bias as long as:

  • The stock market is stable/improving, because that will buoy consumer confidence/spending;
  • The unemployment rate remains near 4%, with average hourly wages growing 4% annually;
  • Gross Domestic Product growth doesn't fall much below 2.5%;
  • Already falling rates encourage borrowing/mortgage refinancing;
  • The inflationary threat of higher energy prices continues to diminish (even if both oil and natural gas futures rose today).

But maybe that's overanalyzing the situation and

all that matters is that fund managers want and need to put money to work.

If that sounds like I'm hedging myself, so be it. But ponder this: A

Nov. 16 piece about

Integrated Device Technology


was the prototype for this new "Reasons to Be Bullish" feature. The article suggested Integrated Device -- which closed at $44.06 Nov. 16 -- might retest its recent lows around $32, but would be a good buy at those levels. The stock traded as low as $27.06 on Nov. 30, but has since rebounded -- closing today at $42.44.

This time around, let's consider



, a Calabasas, Calif., maker of equipment used to test and analyze high-speed data networking equipment.

There's Something About Ixia

Late last week I had lunch at

Palio dAsti, with Errol Ginsberg, Ixia's president and CEO, and Tom Miller, the company's CFO. Both executives struck me as candidates for Monty Capuletti's "regular guy look," circa

Easy Money. (And I mean that as a compliment -- really.)

Prior to the meeting, I was intrigued simply because Ixia was able to go public in mid-October (the 17th to be precise) and its shares have remained solidly above the offering price of $13 ever since. Only



has a better after-market performance among tech IPOs from September and October, according to

blueshirt Group

, a San Francisco-based investor relations firm whose clientele happens to include Ixia.

Ixia's third-quarter results -- earnings of 12 cents a share, a 229% increase from the prior year and a 20% sequential increase -- further piqued my interest. Third-quarter revenue of $21.3 million represented increases of 198% from year-earlier levels and 24.5% from the second quarter.

Most glaring, perhaps, the latest period marked the


consecutive quarter in which Ixia posted a profit. Think about all the unprofitable companies that went public since 1998's second quarter (Ixia's first profitable one) and you realize Ixia could have gone public a long, long time ago, in a much friendlier environment.

Waiting might have cost Ixia its 15 minutes of fame and glory, but Ginsberg said the company simply didn't previously have the internal infrastructure to justify a public existence (demonstrating restraint and sound thinking that have became anachronistic in the past two years).

Another reason Ixia, which was founded in April 1997, waited is it simply "didn't need the cash," CFO Miller explained.

Ixia had funding without traditional venture capital investors thanks to "seed capital" from Jean-Claude Asscher, the company's chairman. Ginsberg came to know Asscher in the late 1980s when the former was vice president of engineering at



, where Asscher remains chairman. (Ixia's principal shareholders and board also include Tekelec directors Jon Rager and Howard Oringer.)

Asscher sold most of his stake in Ixia -- he still owns nearly 470,000 shares -- to


(a big holder of Tekelec shares) beginning in June 1998. In March 2000, Natinco sold the shares to Stephane Ratel, principal owner of

Technology Capital Group

in Luxembourg, who some readers might know better as an auto-racing enthusiast.

After Ixia's 5.5 million-share IPO, Ratel still owned 25.425 million shares, or 47.3% of the firm, according to an amended S-1 filing of Oct. 12. Other company insiders, including Ginsberg, own an additional 12.3 million shares, or about 23% of Ixia.

If that kind of heavy insider ownership concerns you because of what might occur when the lockup expires, note Ratel and his firm have agreed to a 360-day lockup period (twice the normal limit). Thus, Ixia's principal shareholder isn't looking for a quick "flip" on the investment.

No Slowdown Here

Ginsberg and Miller made the trek north last week to visit institutional investors who'd participated in the IPO, as well as meet with some potential new ones. Apparently, the executives had something compelling to say. On Friday, Ixia's stock rose nearly 30%. Today, it gained another 7.5%, closing at $26.875.

"Basically, they liked the story that we make money and have always made money -- that always goes over well," Miller quipped. More importantly, "Even though you see all these preannouncements from networking companies, we're not backing off the guidance we gave to the analysts."

Ixia has sidestepped the spending slowdown/inventory backlog concerns that have dogged major customers such as




Juniper Networks



Extreme Networks


, and



in recent weeks, because Ixia is levered more to those company's research and development, rather than their end markets.

That is, Ixia should be immune from major problems as long as its customers continue to try to build faster Ethernet switches, cable modems and synchronous optical networks (SONET), on which

Credit Suisse First Boston

estimates $1.1 billion will be spent to test in 2001. Ixia also plans to expand its offerings into DSL and ISP networks, among others.

As for the guidance Miller referenced: The consensus among the analysts covering Ixia -- from

Merrill Lynch


Dain Rauscher

, and Credit Suisse First Boston -- is that the firm will earn 39 cents a share this year, on revenue of about $73 million, and 50 cents a share on about $120 million in revenue in 2001. (Merrill and Dain Rauscher were underwriters on Ixia's IPO; CSFB recently acquired

Donaldson Lufkin & Jenrette

, which also participated.)

The analysts project Ixia's gross margins will come down to about 75% next year from a whopping 82.5% in the third quarter. Miller didn't disagree, but noted "we don't see anything that's going to push us much below 80%" gross margins in the near future.

So here's the dilemma: On Thursday, Ixia traded at a relatively modest price-to-earnings ratio of 36 times expected 2001 earnings. After today, the P/E ratio is about 54 times.

While not egregiously valued relative to some highfliers, Ixia runs the risk of going from a value pick to a momentum play. If we've learned anything in 2000, it's that the momentum game is even more painful and nasty on the way down than joyful and lovely on the way up.

We learned that lesson, didn't we?

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.