High-Growth Study Continues
Drip Port continues its high-growth study, adding Redback Networks to the contender list and cutting PMC-Sierra. Also, a follow-up thought on Commerce One, USinternetworking, and Ariba is shared, and December's investment is being sent to Intel.
By Jeff Fischer (TMF Jeff)
November 21, 2000
Last Thursday, we continued to cut companies from our high-growth list. We have a list of more than 50 contenders that we must narrow to a manageable dozen or so to study in-depth. How do we get there? First, the same way most investors do: through subjective cuts.
Like all investors, you and I only invest in certain kinds of companies that match our initial subjective requirements, whatever they might be, and that later pass analytical scrutiny. Our first requirement in this study was a five-year growth rate of at least 25% per year. Our current requirements are for company predictability, understandability, competitive leadership, and expanding possibilities -- all of which are (mainly) subjectively measured. We also have minimum share-price and market-cap requirements.
After USinternetworking (Nasdaq: USIX) and Commerce One (Nasdaq: CMRC) were cut last week, I received many emails, some of them unhappy. Most unhappy readers apparently missed our clarifying comment last week that this is not an analytically rigorous cut at this point. This is a subjective cut.
We cut USinternetworking due to its share price of less than $5, a subjective disqualifier in and of itself. We cut Commerce One partly because we already have Ariba (Nasdaq: ARBA) on our list, and we said that these companies are in the same general industry, loosely defined as online business-to-business commerce.
Of course, all three of these companies focus on different aspects of online business. However, that doesn't matter to us at this stage of our study, because we're not looking any deeper than the general industry overall. In very large industries, we only want to choose the largest leaders. At $16 billion in market cap, Ariba is $10 billion larger than Commerce One. (For now!)
That said, we will consider Commerce One next to Ariba when we begin to analyze businesses in this study. We would have done that inevitably -- and maybe Commerce One will win us over. Either way, as we continue to make cuts from our list, I want to remind all readers that these are subjective cuts, not analytical to any real degree, so please don't be unduly alarmed when a company that you love or own is summarily cut. All investors have different sensibilities for what sort of company feels "right" to them. What is "right" for Drip Port isn't right for all.
More "cut 'em or keep 'em" decisions
Returning to our shrinking company list, Redback Networks (Nasdaq: RBAK) provides advanced networking systems that enable carriers, cable operators, and Internet service providers to rapidly deploy high-speed broadband access to the Internet and corporate networks. Redback is a fast-rising leader. Sales will top $240 million this year, up from $8 million in 1998.
The competitive landscape is crowded, however, and long-term predictability in this business is very poor. Plus, it's difficult for an outsider to understand the ins and outs of the technology, let alone predict where it'll go. We will try to understand, though. Redback is strong enough to merit learning more. If Redback holds sustainable advantages that make its future more predictable, it might become a much larger company. At $70 per share, it's worth $11 billion -- Cisco Systems (Nasdaq: CSCO) could slurp it up if it wished -- and Redback's EPS estimates call for more than 50% annual growth.
Redback Networks joins Paychex (Nasdaq: PAYX), Millennium Pharmaceuticals (Nasdaq: MLNM), Ariba, eBay (Nasdaq: EBAY), and Phone.com (Nasdaq: PHCM) on our contender list. (Realize that, as this list grows, some companies might be bumped by new entrants that we like more!)
Next up is PMC-Sierra (Nasdaq: PMCS). Despite the recent strong financial performance of PMC-Sierra, we're cutting the company from our list because it's in the semiconductor business (on the networking side, in this case). As we've said, we believe that our one investment -- Intel (Nasdaq: INTC) -- in this general industry is enough exposure for a portfolio that will only own six to eight companies total. Our best wishes to PMC-Sierra.
To discuss these companies and Dripping in general, visit us on the Drip Companies board.
Our December purchases
We're sending $100 this week to buy more Intel in December. We also sent $50 to PepsiCo (NYSE: PEP). Our shares to start the Pepsi Drip are on record with the transfer agent, so we sent money to get the plan rollin' and to get a plan statement. We don't know when this money will be invested, but most likely the $50 will be deducted from our January $100 investment.
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Happy Thanksgiving on Thursday, and Fool on!