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June 21, 1999

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Subject: Re: Buy now...thank me later
Author: eschulze

Ah! Now you're getting the hang of it.

The problem with your analysis is that most of the facts you rely upon have already been factored into the current price. I admit (readily) that CPQ has problems - these problems are the very reason the price has been beaten down so very low. I contend that the market has overreacted, and that at the current price level CPQ is a bargain. In fact, I contend that it is the best bargain available in the market. Why is it the best bargain (after all this is nothing more than an opinion), you ask?

1. The fundamental investment problem is assessing the potential for risk in relation to the potential for reward. From a risk standpoint, CPQ is essentially bulletproof. Yesterday, it warned that earnings would be 35 cents (for the current quarter)less than expected. What happened? The price went up! Read the handwriting on the wall - it is not going below 20. All of the bad news is out. So, buying at this level essentially means that one is risking the loss of the money market rate that one would earn if one sat on the sidelines plus, perhaps, a depreciation in value of $2/share. This is a no-brainer - if it only goes up $3 dollars per share in the next 12 months, an investor will earn a 13% return. Am I willing to run the apparent risks for what I feel is a gut cinch, absolutely certain 13% return? Yes, I am. It would be a sound investment even if the potential for reward was not vastly in excess of 13%.

2. Turning to the other side of the risk versus reward equation. CPQ owns Alta Vista - all of it. Alta Vista's volume is 30% of the volume done by Yahoo. Yahoo has a market cap of $27 billion. Alta Vista, if valued by the marketplace in the same fashion that the market values Yahoo, is worth $8 billion. None of that value, in my judgment, is in the $22 per share value the market is currently placing on CPQ - the market has essentially forgotten that Alta Vista even exists. It will not forget forever - it will wake up when CPQ announces the IPO for AV before the end of the year. When that happens the price will bounce and it will bounce big. The analysts will be falling all over themselves to see who can be the first one to upgrade it to "strong buy." They know it - they are just sitting on the fence waiting for the announcement. Then they will be selling it (at a profit) to all of those who can't pull the trigger until some analyst tells them that it is okay to do so.

There is more - see Blax's previous posts - but what I have outlined above is alone sufficient for me to pull the trigger (which I have done).

Sit on the fence, earning a money market rate, if you want to. But, by doing that you risk missing out on an investment opportunity which does not come along very often. The way I see it, those who sit on the sidelines are the ones who are incurring the greater risk - the risk that they will miss the big bounce. Look at Oracle - it beat the consensus estimate by 4 cents and jumped 30% in one day. You can't get that big bounce if you wait for the analysts to upgrade it.

Am I in love with CPQ? Yes, I am. Am I blindly in love with it. No, I'm not. If I perceived that the risk/reward ratio was going against me, I would be out of it very quickly.