Bernard Baruch; “Don’t try to buy at the bottom and sell at the top. … I made my money by selling too soon.”
More than 60 years ago Baruch extolled the trading philosophy of a great number of successful tech investors that follow the palpable momentum – be it the economic cycle, a tech spending cycle or a particular theme. Among this group the term “earnings power” is much maligned, but at the end of the day it often dictates the asset allocation decisions among tech investors. At GTalk, for obvious reasons, we shy away from discussing particular stocks but looking at a grouping of optical component stocks* with a combined market cap of roughly $1.06 billion for trailing twelve month revenues of about $3.03 billion, like everyone we ponder the implications of public valuations and their impact on our M&A market.
Times are scary; revenues in 2009 will likely be less than 2008 and many individual stocks appear on shaky ground. In the best of times, the sector has continued to lose money. But the communications markets are not going to dry up and these components are at the core of every new network. This is not like six years ago when excess capacity and inventory overhang crippled commerce for years. It does not take a wild-eyed optimist to imagine that this is an industry that scales itself and re-emerges with more pricing power than before. That pricing power, combined with better asset utilization and sane financial structuring will enable investors to see the growth and earnings power that present an acceptable return on investment for private companies as they either go public or merge with public entities. Unfortunately, as per Baruch’s advice, I suspect a large segment of the investment community avoid these stocks until signs of turn are well in place, choosing instead to focus on less volatile investments. Their loss.
* (JDSU, FNSR, OPXT, OPLK, EMKR, BKHM, AVNX, AFOP, API and OPTM added in historical comparisons)
