All right. Who's hungry for some ice cream? We're in the middle of August and the stock market is a sweltering misery to behold but a smorgasbord for buyers (if you can find decent values on great businesses), and in the midst of this heat we're ready to start buying something cool and new. In fact, we're marching toward a new stock purchase with an unstoppable cadence.
If only we could push these slow foot soldiers out of our way -- meaning, our remaining high-growth candidates. Like a neglected girl at a high-school sock dance, these companies don't interest us enough to give them much attention. We've already considered them behind the scenes, and for a long time, but these companies just don't ring our bell. Plus, we believe that we've found our fair dancing partner, Paychex (Nasdaq: PAYX).
However, due diligence (coupled with a dash of paranoid psychosis) demands that we take one more look at the other contenders -- a passing glance at least -- to make certain that we're making the right choice. The remaining contenders are not slouches. They were suggested by readers and they made it to the finalist stage. All are interesting, promising businesses. The ones that we bypass are simply not right for us in the Drip Port. They may be right for you at home.
The first one: Openwave Systems (Nasdaq: OPWV). We could almost bypass it on the name alone: Openwave Systems -- in the conservative Drip Port? Come on. Who are we kidding? We might as well buy a company that plans to colonize the moon. Well, okay, Openwave isn't that far-fetched. It is, in fact, a cash flow positive leader in the still-promising (don't gag) telecommunications industry. Despite this industry's black hole-type contraction, it will re-emerge with importance, and its few companies that escape an early death should perform well.
Openwave is positioned to escape and prosper. The company is the result of the merger of Phone.com and Software.com. Openwave primarily licenses software that delivers content to wireless cell phones. Thirty-seven carriers have contracts with Openwave (though some of these companies are on shaky footing), and the $3 billion company is on track to earn more than $400 million in revenue this fiscal year. Bill Mann (TMF Otter, which is one of my favorite TMF names, and is appropriate for Bill) wrote of Openwave's recent results in detail. He has cautious optimism.
The stock trades at just 30 times earnings per share estimates for the fiscal year ended next June (excluding merger costs), and it is on track, for now at least, to actually meet estimates. In this industry, Openwave stands out. Risk-embracing Rule Breaker investors might want to watch it and consider it for a possible lump-sum purchase. I would not start buying the stock in small amounts and average in over many years, because Openwave is more a situation that will either excel soon (within a few years) and continue to excel, or will fade away, perhaps over many years, with the technology not becoming important enough or being surpassed.
Openwave is not, in other words, a good dollar-cost averaging situation -- in my opinion. For that reason and because it is a difficult business to understand or predict (as we've said before, software companies aren't Drips), we need to let it go on without us.
The next company: Redback Networks (Nasdaq: RBAK). I have three words to throw at this situation: area of competence. Networking products, and the networking industry, are a little beyond my Midwestern, corn-growing, pig-raising, trout-fishing background. I understand a company like eBay (Nasdaq: EBAY), another high-growth contender, where I can sell and buy junk and toys. But I don't even understand how my phone gets a dial tone, let alone how a networking product works, what the competitive advantages of a product are, and where the industry is headed.
Do you understand, with real confidence?
I could start reading the industry rags to learn about networking, but why risk an aneurysm for something that doesn't make my heart go pitter-patter? I'm not interested in networking as an investment. That's part of the reason why I wish Intel (Nasdaq: INTC) would stick to its knitting. Besides, it would take months to learn just the surface gloss of the networking industry and its players, and I still, then, wouldn't be a market-beating stock picker in the industry. I'm much better served sticking with industries that I understand from the get-go, or have already learned about.
It's for these reasons that the humble yet market-beating Drip Port will bypass these two high-tech companies. They are beyond our area of competence and life is short. Maybe this column will upset you because you know these companies inside-out and you believe they deserve attention from other people, too; but the column should simply remind you, like us, to stick to what you know or have keen interest in, and don't ask other investors to take fliers on things they won't well understand. Now, about that ice cream...
Jeff Fischer has never been to Asia, where Openwave reportedly rocks, although he has been to Chinatown in Chicago. His favorite ice cream (how unoriginal) may be mint chocolate-chip. Of companies mentioned, he owns shares of eBay and Intel. The Motley Fool is investors writing for investors.
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