May 07, 1996
Zytec Corp. (NASDAQ: ZTEC)
7575 Market Place Dr
Eden Prairie, MN 55344
WWW site: http://www.zytec.grs.com
One week ago, the Boring Portfolio acquired 200 ZTEC at $27.14 apiece, including broker's fees. Today, each of those shares is worth $46.50 -- better than a 71% gain.
The decision is whether to continue to hold or else take profits and move on. The choice I've made (and that's all it is, is my choice) is to sell the Borefolio's 200 shares of Zytec sometime tomorrow.
What?? How can I be so ungrateful to a stock that's made the Borefolio $3,872.51 richer in only one week?
Believe me, I am very grateful, as are Zytec shareholders everywhere, I'm sure. But from here I sit, it's time to sell, gratefully. Here's why.
Recall that when I first bought ZTEC, way back seven days ago, the stock had closed the preceding Friday at $24, after a post-earnings report sell-off that can only be described as stupid.
Here was a company that was growing earnings at a furious pace, with orders literally coming in the door faster than the company could fill them, and with a market capitalization of less than HALF of projected sales for this year. Such opportunities are rare indeed, and so I leaped immediately.
When I made my buy, I estimated the stock's current fair value at around $35 and suggested that it should easily grow into a price that would at least bring the company's market cap up to par with its estimated annual sales. That would put a target price for ZTEC for later this year at around $48.
Whatever the critics say, markets are efficient. They're just not efficient with regard to every stock at every moment. When the market recognized the anomaly with respect to Zytec's price, it reacted rapidly, and much to our profit. A week later, here we are with ZTEC at $46.50.
Could the stock continue to grow from here? Oh, absolutely. But with ZTEC now trading at 27-times estimated EPS for 1996, I suspect that the growth will be pretty leisurely. The stock is fully priced, and this guy is due for a rest.
Moreover, the prospects of a secondary offering in the not too distant future are fairly high (the company needs to expand yet again), and there may well be some stock options kicking in about now that will be exercised soon.
Should ZTEC drop back noticeably, I might well step up to the counter again. I think it's a wonderful company, with outstanding prospects. But for now at least, I'm gonna take my profits.
--Greg Markus (MF Boring)