For those who think this column has been too gloomy lately: "My venture friends don't want to do venture investments anymore," says Doug Whitman of
in Palo Alto, Calif.
Instead, he says many of them are hunting the junkyard of black-and-blue "real" companies, whose only sin is that they've missed quarterly estimates, causing the momentum crowd to scramble.
Whitman isn't the only money manager to mention the bargain-hunting. One investor, who has been mostly short for the better part of this decade, now tells me he is mostly long and has recently been dabbling in companies like
. Here's a company that operates in a market that is flush with too many rooms, which is expected to be the case for at least three years, according to some estimates. "But my typical holding period is three to five years," says this pro, who is willing to wait.
Similarly, Whitman says his picks "aren't for the portfolio manager who wants to make the most money in the next 90 days. This is like venture investing. It's for the long-term investor."
What makes these bargains so compelling? According to Whitman, as public companies, they've never lost money and haven't yet forecast losing money ("yet" is the key word there). But just as important, they all have significant cash; the average has the equivalent of 60% of its market cap in cash. And they have no debt. What's more, their current stock prices are no more than a quarter of their recent 12-month highs. "And if you remove cash and interest income from the valuation, they sell on average this year and next year of under seven times earnings."
His favorites include:
- Security Dynamics (SDTI) , which has $6 per share in cash, earned 41 cents per share last year. It's expected to earn 70 cents next year. With the stock at 8, down from 42, the company is an active buyer of its own shares. "It's still the dominant force in the Internet security market," Whitman says.
DSP Communications (DSP) , which makes chipsets used in cell phones. Earnings are growing sequentially, and with the stock one-third of where it was at the beginning of the year, the company is aggressively buying it back.
Premisys Communications (PRMS) , which supplies products used by telephone companies to provide customers access to their networks. Earnings are rising sequentially, and the company has been buying back its stock, which has lost three-fourths of its value this year.
Advanced Fibre (AFCI) , which supplies transmission products for telephone companies and carriers. At less than 5, the stock "is amazingly cheap."
In fact, they're all so cheap that Whitman thinks if they don't head north by sometime next year, "they could turn around and be acquired at substantially higher prices."
He adds that in the 15-plus years he has been in the securities business, "You've never been able to buy these level quality companies at valuations this low." (By way of disclosure: Last time I checked in with Whitman for some picks, about a year ago, he mentioned three lesser-quality companies. Since then, one's done very well; the others are in need of some Ken-L Ration.)
Judging from the attaboy back-slapping on the
message boards yesterday, as well as some of my email, you'd never know that Compaq merely
made its quarter by a penny. Inventories were down to three weeks (yippee, must mean no channel stuffing) and the company's execs voiced no concern about business for the foreseeable future.
Yet that didn't cause
gutsy Ashok Kumar to back away from his move Tuesday to reduce his fourth-quarter estimates to well below Wall Street estimates and to mention that even next year's estimates are at risk. Reality, he says, is that sales are lousy. "The true health of a company is the top line, and if it's not showing any growth, no matter what accounting gimmickry they may do, it won't help." (Unless, of course, the company is making the top line by pushing too much merchandise into the channel, and Compaq says it's not doing that!)
Kumar's guess is that Compaq will do the "prudent" thing and guide analysts lower in future months. "For them to grow the top line by $2 billion is unrealistic," he says.
That warning late yesterday that
expects its biz to slow next year doesn't strengthen Compaq's case.
Alas, Poor Sunbeam
If you didn't notice, it fell below 5 yesterday for the first time since the company went public (in a reverse leveraged buyout) in 1992.
Herb Greenberg writes daily for TheStreet.com
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