If you've been following along in our nightly columns for the past two months, these decisions won't be the least bit surprising. As such, we're bucking the trend of issuing the usual buy reports because we've essentially been writing the buy reports bit by bit over the past couple of months. It's all available for your perusal in the RM Archives. Below, I've summarized the rationale behind our decision making, as well as links to the relevant back articles that support our decisions.
To recap, when we started our search for potential new companies, our primary goals were to: a) Stay true to our Rule Maker selection guidelines, especially the financial criteria; b) Look for potential emerging Rule Makers that might add some extra octane to our port; and c) Be sure that any new additions are additive to the quality of our overall portfolio. Based on those three goals, I'm confident that Nokia and JDS Uniphase fit the bill poifectly.
Other candidates that were batted around for consideration include America Online (NYSE: AOL) and Amgen (Nasdaq: AMGN). Of course, with the merger of AOL and Time Warner, AOL doesn't meet our financial criteria nearly as well because of the debt load. Besides, we already have Yahoo!, which is in a strong position against AOL. That leaves Amgen, which is surely a top-o'-the-heap Rule Maker. The biotech leader has no debt, high margins, efficient cash management, and strong growth prospects.
Amgen's only shortcoming -- if you can call it a shortcoming -- is that a biotech/pharmaceutical company can never achieve gorilla status the way a Rule Making technology provider/enabler can. Of course, Nokia and JDSU are no doubt riskier long-term holdings than Amgen, but with our diversified portfolio of ten existing holdings (including two pharma companies), we want to take some calculated risks that will hopefully boost our long-term returns.
Additionally, it's worth pointing out that we considered the possibilities of either buying just one new company or even allocating the cash to one or more of our existing holdings. Cisco (Nasdaq: CSCO) and Yahoo! (Nasdaq: YHOO), for example, are both firing on ALL cylinders. Even so, I think Nokia and JDS Uniphase -- each in their own unique ways -- represent opportunities that are at least as good as the current opportunities in our best existing holdings.
Here's the short-take on each of our new Rule Makers:
NOKIA -- I think it's clear that Nokia is making rules in the wireless world -- a critical component of the new economy that we'll want to have exposure to in the RM Port. Based on my personal experience with the Palm VII and a Nokia phone, I envision a day when everybody carries these things around and does everything on them. That's powerful.
Nokia in brief (trailing 12 months):
Market Cap $240 Billion TTM Sales $19.8 Billion Sales growth 48% Gross margins 38% (trending higher) Net margins 13% (flat) OCF margins 15.7% (trending higher) FCF margins 8.8% (trending higher) Net Cash $3.1 billion (trending higher) Cash-to-debt 3.9x Flow Ratio 1.19 (trending lower)The margins are on the skinny side, but everything else is schweeeet. Nokia's global market, I think, is unprecedented in size and scope. In sum, Nokia is a true blue Rule Maker -- a global consumer powerhouse with expanding possibilities galore and tight financial management. Bill and I have explained our liking for Nokia in several recent Rule Maker columns:
- Why Nokia Rules the Roost, by Bill Mann (1/26/00)
- The Mobile Information Society, by Matt Richey (1/31/00)
- Nokia's Bang-Up Earnings Report, by Bill Mann (2/2/00)
JDS UNIPHASE -- Like Nokia in the wireless world, I also think it's clear that JDSU is making rules in the fiber optic world. JDSU's optoelectronic components are benefiting from the immense networking build-out that is taking place and will continue to take place for many years. I'm reminded of one fact in particular which Phil cited in one of his columns: "The estimated average annual growth rate from 2000 - 2025 -- yes, the next 25 years -- is 18% for active components and 20% for passive components. All I can say about that is WOW!" I concur.
Here's the low-down on JDSU (trailing 12 months):
Market Cap $72 Billion TTM Sales $673 Million Sales growth 204% Gross margins 49% (trending higher -- slightly) Net margins -63% (totally skewed by merger costs) OCF margins 20.0% (no clear trend) FCF margins 4.0% (no clear trend) Net Cash $885 million (trending higher) Cash-to-debt No Debt Flow Ratio 1.54 (trending lower)
JDSU's financials are quite a bit like those of Yahoo! when we purchased last year. That makes JDSU an emerging Rule Maker -- higher risk, but higher potential returns. Based on Phil's research, I'm convinced that JDSU is a high percentage bet of one day becoming a world class Rule Maker along the lines of Cisco. Here are the links to Phil's in-depth study of JDSU:
- JDS Uniphase Revisited -- A Fisher Perspective, by Phil Weiss (1/5/00)
- Is JDS Uniphase a Rule Maker? -- Part 1 of 2, by Phil Weiss (1/13/00)
- Is JDS Uniphase a Rule Maker? -- Part 2 of 2, by Phil Weiss (1/18/00)
Our discount brokerage account has $6,638 in cash ready and waiting. Most of that sum was the result of selling the Foolish Four, which allowed us to raise $5,446. On top of that, you'll recall that we decided to allocate our January and February $500 savings to the new purchases. All told, we now have $6,638 in cash, but approximately $200 needs to be kept in cash for taxes in April (yep, we account for taxes and report our returns on an after-tax basis in this port). So, that leaves $6,438 to spend. Per the usual Fool trading guidelines, the Rule Maker Portfolio will purchase approximately $3,200 worth of shares in each of Nokia and JDS Uniphase in the next five trading days.
A few final announcements...
Zeke and I have received quite a bit of e-mail in regard to the contest announced Friday to find a more Foolish name for the Cash Flow Net Margin (a.k.a. FCF Margin). The "official rules" (as required by the "regulatory authorities," a.k.a. "They") are chiefly that you post your idea to the Rule Maker Strategy Board (sorry, we can't accept e-mail entries). Second, the deadline for your entry is Tuesday at midnight Eastern time. Finally, Zeke will award the secret (and very cool) prize on Friday. Keep the ideas comin'!
Finally, it's time to announce the winner of an autographed copy of Rule Breakers, Rule Makers for last month's contest where we were looking for the best analysis of a new Rule Maker. Actually, we have two winners, both of whom made a strong case for Nokia's membership in our select class of Rule Makers. The first winner is Mycroft, who composed an outstanding Fisher analysis of the company. And, the second winner is geoffchase, whose comprehensive Rule Maker analysis picks up where Mycroft's left off in proving beyond a shadow of a doubt that Nokia is a truly dominant Rule Maker in an increasingly important industry. Outstanding job, Fools! To anyone doing due diligence on Nokia, these two posts are required reading.
