AN ACQUISITION THAT COST $18,100,890 PER EMPLOYEE
or
DON'T TRY THIS AT HOME - Part 2
We believe there has been a distinct and accelerating negative
change in market sentiment since March 10, 2000 when the Nasdaq
Composite Index peaked at 5132.52. The underpinnings of the stock
markets had been weak for quite some time, but the crash in the Nasdaq
has really gotten peoples' attention. On April 14th the Nasdaq
Composite lost 355.49 to close at 3321.29 --- off 9.67% for the day,
while the Dow Jones Industrials lost 617.78 to close at 10305.77 ---
off 5.66% for the day. The Dow's high was 11750.28.
It reminds us of last September's Commentary: "INVESTING ---
STILL LIKE SHOOTING FISH IN A BARREL? or DON'T TRY THIS AT HOME!"
At that time we pointed out 10 very large and well-known
Nasdaq stocks where the combined difference between their highs and
their August 4, 1999 price had resulted in lost market value of $1.9
Trillion. Subsequently a number of those stocks rebounded, and
additional extraordinary market gains were made by many new IPOs which
would trade up five to 10 times above their offering price on the same
day.
But this time we think things may be different as the Fed
continues to tighten by raising interest rates. Please note:
 |
March 31st --- the Wall Street Journal reported: "Tiger
Makes It Official: Hedge Funds Will Shut Down"
"Value-Investing Chief Decided He Couldn't Make Sense of
Market." Julian Robertson was closing down his hedge funds
and returning about $4.5 billion to investors while walking
away with about $1.5 billion of his own funds. Although he
does not expect fundamental analysis to be forever out of
fashion, Mr. Julian H. Robertson, Jr. (head of the Tiger
Management LLC hedge fund) said: "The market goes through
these periods of irrationality, where the worst stocks do
best. We've been in a period of irrationality for such a long
time that it hurts a rational strategy. You have a group of
irrational investors carrying the market."
|
|
March 31st --- In the same article, Stanley Druckenmiller,
managing partner at Soros Fund Management, the world's biggest
hedge fund which had temporarily helped to improve its
fortunes by switching into tech stocks, said of the Tiger
developments and Mr. Robertson: "It's not a sad day …. It's
like a guy who double bogeys the last holes but still wins the
golf tournament; he has a phenomenal record."
|
|
April 28th --- Stanley Druckenmiller left the Soros Funds
as George Soros opted to close down his funds. Mr.
Druckenmiller who had been with Soros Fund Management since
1987 and assumed control in 1989 of Quantum (Soros' largest
fund with $10.4 billion in assets at the end of last year).
|
|
April 29th --- At Berkshire Hathaway's annual meeting
Warren Buffet, America's richest investor, announced that his
aversion to investing in technology stocks contributed to its
worst ever absolute and relative returns in 1999. Later he
said: "When we look back, we will see this as a period of
enormous amounts of wealth transfer [rather than wealth
creation]. He later said that he could have made more money
last year by going to the movies instead of going to the
office. |
What is the common thread running through Robertson's, Soros' and
Buffet's problems? The short answer is Valuations. The long answer is
Valuations.
|
The American economy continues to be very strong |
|
The American unemployment rate at 3.9% is the lowest in 30
years. |
|
The American dollar is very strong as the Euro has fallen 24% to
88 to
90 cents which is down from about $1.18 where it began on January 1,
1999. |
Valuation - an example: Everyone loves Cisco Systems.
Obviously everyone loves Cisco because it is arguably the most
successful company in the hottest sector of the Internet. Even at its
May 5th closing price of 67 3/4 (52-week Range of 25 15/16 - 82) its
stock was valued at $470 billion, second only to General Electric now
that Microsoft no longer is numero uno as a result of its anti-trust
problems.
Cisco has grown at more than 50% per year. At 67 Cisco sells for
|
190 times its 35 cents per share earnings for the fiscal year
ending July 31, 1999, |
|
130 times estimates of 52 cents per share earnings for fiscal
2000 and |
|
100 times the estimate of 67 cents per share for the fiscal year
ending July 31, 2001.
|
On May 5th Cisco paid $6.1 billion in stock for ArrowPoint
Communications Inc. that is located in Acton, MA, has 337 employees
and makes software for the Web traffic-management field. If our
math is correct, that works out to $18,100,890 per employee!
It is important to note that ArrowPoint's initial public
offering was less than five weeks before Cisco's purchase at a price
of $34 per share. It is also important to note, as we have heard, that
ArrowPoint had set a price range of 14 to 16 for its initial public
offering before coming to market at $34 on March 31st. On May 5th
ArrowPoint's stock closed over $140 per share representing a price
increase in those few weeks of 412% above its offering price.
ArrowPoint, a company that was valued at about $1 billion on
March 31st and had a market valuation of $3.67 billion about a week
ago, really hit the lottery being sold for $6.1 billion in Cisco
stock. (And we think a $320 million lottery jackpot is a lot of
money!)
This example of Valuation - coupled with extraordinary
Volatility - is what has been so difficult for Julian Robertson,
George Soros, Warren Buffet and ourselves to reckon with after years
of fundamental analysis and value-investing.
To repeat one more time, but probably not the last time:
"The problem continues to be what prices should be paid for these
companies. Meanwhile, avoiding the land mines in these tumultuous
markets is not easy."
Your
comments are always welcome, and we invite you to visit our Web site
www.hamiltonadvisors.com. |
|
John, W. Hamilton
May, 2000
JWH: mm
jwh@hamiltonadvisors.com
|
Market value information (including
prices, accrued income, and currency exchange rates)
furnished in these reports may be based on data obtained
from one or more vendors. Although this information
comes from sources considered reliable, neither Hamilton
Advisors, Inc. nor any of its vendors makes any
representations or warranties, express or implied,
concerning the accuracy, completeness or timeliness of
such information. Republication without Hamilton
Advisors Inc. prior written consent is prohibited.
|
|
