May 2000
A decade worth of stock market volatility has been crammed into the first four months of the year 2000. Our quality investment focus has preserved our clients’ capital well during this turbulent time.
Maybe we should blame the stock market’s recent volatility on the baseball strike … because it was about then that Wall Street became America’s favorite pastime. Millions of new investors with billions to spend have greatly influenced the stock market. There is no other way to explain so many unusual events such as ridiculous overvaluations for unprofitable companies and overly optimistic valuations for some very fine companies.
A good example of an excellent company with an inexplicable valuation is Cisco. Like Microsoft last year, Cisco has a $420 Billion total market value but has revenues of just $20Billion. Despite its predicted growth rate of 30%-40%, it is notable that the company would likely go bankrupt if they borrowed money to repurchase one-third of their shares. Why `should we buy shares in a company that cannot afford to pay cash for its own shares? By contrast, Lucent would survive a similar cash repurchase of its stock and Textron’s earnings per share would skyrocket.
Our focus on high-quality Blue Chips at reasonable values has led us to some attractive new investment opportunities. As the stock market has corrected, we have added to our portfolios some great companies which are trading well below their recent highs. Positions in Texas Instruments, Wal–Mart, Sysco (the food company) and Textron have been purchased. Texas Instruments is the leading manufacturer of computer chips for digital wireless communication appliances. The stock dovetails well with our current holdings in Hewlett Packard, Lucent and BellSouth and gives our clients broad exposure to the emerging wireless communications industry. Wal-Mart was purchased because it has the most powerful distribution system in the world and we expect them to profitably exploit any advantage the Internet may ultimately offer consumers. All four of the added positions are leading companies in their respective industries and trade at reasonable valuations relative to their growth prospects.
As for our other Quality Core stock holdings, we have seen bountiful evidence of the phenomenon discussed in our last newsletter entitled, “The Sky is Rising! The Sky is Rising!”. Specifically, companies on our Buy List are implementing Internet strategies which allow them to increase their profit margins beyond historical norms. Both General Electric and Automatic Data Processing have recently announced that they expect their future profit margins to be higher than ever.
As for our current market assessment, we have welcomed the recent NASDAQ correction which has begun an honest debate about valuation. Much excess remains, but we believe it is by no means concentrated in the 25-30 Blue Chips we hold. We are optimistic that disappointing earnings from pure Internet companies will demonstrate the benefits to owning reasonably valued diversified Quality Core stocks with predictable businesses.
We welcome comments and questions at any time and look forward to positioning our clients’ portfolios in such a way that they participate in the global growth that we expect in the coming decades. Play ball!