Post of the Day
March 03, 1998

From our AOL
Compaq Board


Subject:CPQ: Analysis, Trades, and Investing
Author: DDilts2704

At the risk of being accussed of being terse, much of the discussion on this board the last few days seemingly focuses on an array of issues that perhaps are irrelevant in both the long and short run. Near zero margins (3% I think is where one poster placed them) are at odds with the available evidence. Insider trading, and comparisons of price performance with DELL, product competition from NEC, AMD's own peculiar problems, and the solar eclipse have little to do with the what the real issues are with CPQ.

God bless, and keep Lucy Painter, and she may be the most respected analyst someplace for something, but I've never (Not now, not three months ago, and not three months from now) been impressed with either her analysis or her recommendations. No doubt there are many knowledgeable, reputable analysts in the world, and I have no doubt that Lucy Painter is one of them. Simply because she reiterates a buy on CPQ means little or nothing. Our Chap at Salomon Smith Barney downrated CPQ because "our sources" indicated that there were negotiations in the channel, so what?!?!

Look at the SEC filings as TMF Meows suggested on 26 Feb. 98, in fact a link was provided to the Fool's News on that date, with a link to the 10K report (as I recall). The fact is that the 10k reports clearly indicated, in definitive language what had happened to inventories, and the news was all very positive -- nothing negative there, except CPQ may be a little light on inventory with its deals with Tandy and in Japan. Smith Barney's caution is based on "sources" that remain unidentified, and without the specifics -- come on now, give me a break. Is any rational, reasonable, responsible adult going to credit the Smith Barney babble over the SEC filings? Not convinced? Someone else on this board suggested that Smith Barney crossed a trade on the very day its analyst took this waffled whack at CPQ. I went to Reuters, and my, my there it was 150,000 crossed by Smith Barney at 32 3/4 on 26 Feb. 98. Shall we discuss the limits of self-interested recommendations? I'll leave the meaning of this for each of you to infer, but there's little left to the imagination here.

I don't want to keep harping on this investor sentiment and uncertainty issue, but I'm going to give it one more try (tried back about Wednesday last week), but CPQ has a multitude of things on its plate right now, not the least of which is the DEC deal. Again, for those of you who foregot, go back and look at what happened to CPQ and DEC in the November, December 1997 period when it looked like the DEC deal wasn't going to happen. Both stocks got hammered. In fact, I stopped adding to my position in CPQ because I began to doubt that CPQ was going to make a deal for DEC. CPQ wanted to do servers, and simply didn't have the service necessary in place to effectively compete in that market. Further, the match of assets that DEC brings to CPQ for that business was like it was scripted, and was as nearly a perfect fit as you're going to find, with enough of DEC left over to liquidate and significantly reduce the cost of deal. By January I was ready to sell a portion of my position in CPQ because it didn't look like the DEC was going to happen -- which had simply awful ramifications for CPQ's forray into the server business. Those fundamentals have not changed one whit. The fifteen percent margins on the PCs have not changed one whit, if anything there's a case to be made that CPQ's margins will improve, albeit, marginally this quarter, particularly on the low end PCs -- that's thanks to the Tandy deal and the economies of scale the Tandy deal brings to the low end models.

UNCERTAINTY is the single and sole cause of the short term problems CPQ is experiencing, can you possibly imagine that CPQ's price performance could be impacted by the Smith Barney Baloney if investors' views on CPQ could be characterized as stable, bullish sentiment -- no way!!!!

I sat through endless boring sessions in a professional conference over the last four days listening to economists drone on about the rediscovery of the wheel with higher order mathematics. But there was one session that was particularly relevent to this particular problem, a couple of Neo-Keynesians, we busy trying to explain the relatively interesting compression of the yield curve and silly stuff going on in the bond market over the past few months. A couple of rather well known finance types point out that the efficient market hypothesis works out just fine when there's little or no liquidity in the market, add liquidity you add volitility, hence uncertainty. One of the popularists there argued that its because of the uncertainty that you get abberations in factor markets, hence uncertainty, begets more uncertainty (my interpretation of his remarks). All this uncertainty scares the pine tar out of analysts and investors alike, but as long as there's no confirmations to the down side, then investors and analysts will learn over time. In other words, it is a real simple drill, CPQ is being tested in the market, as long as it continues to perform (and the fundamentals confirm that it will) then everytime there's bad news the price will go down, and the good news will continue to be ignored until such time as the uncertainty in people's minds disapates. Uncertainty is a funny concept, it generally can only be mitigated by repeated testing (hence a learning curve), but when that uncertainty washes out of the system there is generally explosive price appreciation. If there was ever a situation you want to be long on, it's a quality company that repeatedly confirms its fundamentals, because when that threshold from uncertainty to certainty is crossed, you may wind up chasing this one and never catch up. It's best to be prepared and waiting for that wave when it comes, and folks it is coming IMHO!!!!

Woof! Paq -- a dog?!? please?!?

FWIW
Warmest regards,
David


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