As I age as an investor, I find myself reaching conclusions in an increasingly simpler fashion rather than through increasingly aerobic exercises of numbers and analysis. Maybe this is the result of a slowing brain, but I believe it's really the result of realizing my limitations and deciding to "stick to my knitting," as the saying goes.
As I wrote in 1999 in a column titled "Focus, Focus," I've come to understand only a few industries very well in the past 10 years. I've only tried to understand a few in-depth. Unless there is incremental value to be received (value that is also greater than the cost of your time and energy) by learning about new industries, there isn't a reason to do so. I believe that Fools should choose their strengths and interests and stick to those. When strong new interests arise, of course pursue them, but don't pursue something just because it's the hot topic of the month.
My belief in focusing on one's few core competencies inevitably has an influence on our current study for a new high-growth investment. There isn't a way to avoid that, nor should we long for one. Because we're all individuals, each of our investment theories and interests will differ, as will our decisions. The best that we can do is adapt the best ideas from the best investors (which is why Buffett is the most quoted investor in the world) and try to work those ideas into our own strategies. That's why the Fool provides an Investing Strategies area: To provide ideas from various points of view, so that we might all learn together.
If that seems like an ominous introduction to optical networking component company Newport Corp. (Nasdaq: NEWP), it probably is, but not by Newport's hand.
Although founded in 1969, Newport has built an impressive track record in the past five years as sales grew at a compound annual growth rate (CAGR) of 20%, to $252 million in 2000, and earnings per share grew at a 41% CAGR. Earnings per share are estimated (actually hoped) to grow at about the same rate the next five years.
From the horse's mouth, Newport is "the leading worldwide manufacturer and distributor of precision components and systems used for development and application of laser and optical technologies, supporting not only advanced research, but also sophisticated new technology and industrial applications. Its products and expertise are increasingly used in semiconductor manufacturing and testing, fiber optic communications, and other commercial applications that require ever-increasing higher-precision and tighter tolerances."
Most of what I've learned about Newport, I learned from the Fool's Industry Focus 2001, where Newport was a focus stock analyzed by one of our Rule Maker managers, Richard McCaffery. Rich also provided an excellent overview of the optical networking industry. On Newport, he wrote that the company is trying to become the Applied Materials (Nasdaq: AMAT) of the optical components market.
Just as Applied Materials supplies manufacturing equipment to most semiconductor makers, one of Newport's goals is to supply manufacturing equipment, as well as testing, packaging, and assembly devices, to the optical industry. Its catalogs, the Newport Catalogs, hold more than 10,000 products sorted into several categories. Groups include positioning equipment for motion control and precision automation, laser optics, vibration control products, photonics, and video metrology. (To learn about some of these areas, visit the Fool's Telecom & Networking InDepth area.)
Newport has more than $300 million in cash and securities and only $9 million in long-term debt, and it is growing profitably by selling to promising new industries. At $80 per share, it trades at 53 times the year 2001 earnings per share estimate of $1.52, while earnings are expected to grow 79% this year and 33% next year (big guesses, especially 2002).
Newport is arguably more predictable than most companies involved in fiber optics. Its diverse product catalog provides the company much more room for error than an optics firm staking its future on one or two optic products alone. For this reason, I view Newport as being like a Carlisle Cos. (NYSE: CSL) of the high-tech world. Carlisle manufactures hundreds of products, too, but for the roofing, trucking, automotive, food-service, lawn and garden, and other markets. It makes wheels for golf carts, for example, and shingles for roofs, and it has been a reliable 14% annual grower. (It's a good Drip candidate itself.)
Newport has just as much -- or even more -- product diversity than Carlisle, and in much-more-quickly growing industries. So, it will likely prove to be a strong investment for certain types of investors... but, well, probably not for us in Drip Port.
Right for one, wrong for another
How can the same investment be "strong" for some investors and not suitable for others? Well, timeframe does matter. A five-year investor could have more luck with Newport than a 16-year investor, which is what we are. Sixteen years is too long to try to predict an outcome in the fiber optic industries in which Newport is operating. The next five years alone should provide substantial, and even predictable, sales growth. But, any longer than that, and anything could happen. Consider that, in the past 30 years, Newport didn't top the S&P 500 until the year 2000.
Not allowing ourselves to invest in largely uncertain, but often promising, industries is one of our weaknesses as slow, dollar-cost-averaging, decade-plus investors, but it is also one of our strengths. We must be as certain as possible that we steadily put our dollars into something that will still be thriving and growing even 15 years from now, so that our years of slowly saving and investing aren't squandered.
Another factor: Newport's business is difficult for anyone to understand and keep abreast of. So, because Newport presents too much long-term uncertainty, as well as much business complexity, we must bypass it as an investment for this portfolio. If you at home are interested for your own reasons, Newport does have a Drip. Unfortunately, it costs $7.50 per cash investment.
Jeff Fischer still owns an Intel 286 computer with 8 megs of RAM and he actually had to use it last week to find an old file on a floppy disk. To see the stocks that he owns, view his profile. The Motley Fool is investors writing for investors.