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October 20, 2000

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Juniper Networks

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Subject:  Re: buyjnpr..if you read my post
Author:  BruceBrown

Chris,

Bruce, you're so damn good. Any chance you could tell me what will gain 350% over the next 12 months. I certainly haven't gotten much right since July. :)

Seriously, though, any "Gorillas" out there that aren't already valued over $10 billion or so? You know I'm not a fan of the Gorilla strategy but that's only because of the lack of attention paid to entry points and price. I have no doubt the Gorilla strategy is the right one to identify the stocks most worth watching (and, for me, trading.)

Not to worry, Chris - plenty of large-caps have humbled me (Qualcomm/JDS Uniphase/Yahoo!/Intel), but the small-caps and mid-caps have balanced things out. I know how you feel about the overall concept of the gorilla game, but if you get beyond that, there are some fundamental things to understand about the high technology industry in terms of mass market, network effects, the proper type of progress for the technology and the desired market place where that technology is targeted. Obviously, the smaller niche markets with limited growth potential are way down on the list of interest.

Likewise, we can certainly look back in retrospect at the past 12 months and agree that entry price without regard for the economic situation does need to be paid attention to - especially for the more mature gorillas and kings. Microsoft and Intel - the two gorillas of the PC TALC have seen the past couple of years erased in terms of gains. These guys are not dead, but the CAP balloon awarded to a gorilla has been adjusted for the interest rate, bond rate, tax rate environment and slowing growth that comes with such an economic environment. This is a 'normal' stock market reaction and perhaps blaming the entry price issue really is not the appropriate scape goat, but our inability to be economists and see far enough into the future or understand all the fundamentals of economic cycles. They obviously happen and you and I are old enough to have seen them happen in the 70's, 80's and 90's. The positive outlook is that the cycles come and go. What's important is to realize what kind of companies perform well during the cycles and bounce back first once the cycles have begun their transition to the next cycle. 1990-91 is a fairly good comparative period, but each period is unique unto itself.

The book itself does not say that one should disregard price, but talks about the types of environments in the CAP chapter (page 87) about what can occur in regards to the value of the share price when interest rates/bond/taxation equation is adjusted. Yes, Paul Johnson stated that in the early IT led tornado growth a comment which was pretty much in disregard to the price, but he did couple it with the statement that in terms of valuation - Juniper was the company with the highest valuation. No matter how we look at the valuation - be it the amazing ROIC, a gorilla CAP award being received, revenue growth on a sequential or year over year basis - there is little disagreement that the valuation remains on the highest of high levels within the IP/Broadband space.

The question is then raised, why are we paying for a balloon CAP in stocks like Juniper, Redback, Brocade, Extreme, Cisco, Emulex, Broadcom, Ciena, Sycamore, JDS Uniphase, Seibel, i2, Ariba, CommerceOne, EMC, Network Appliance, etc... when by any sort of traditional valuation approach it would appear to take our lives, our children's lives and our grandchildren's lives to reach some sort of a 'goal' of filling the britches so to speak? Yes, we know that if anything, some of the gorillas and strong kings have proven to exceed any wild expectations that analysts and investors put on them going out in lengthy periods of time. We also know that a list like the group above involves some pretty impressive revenue growth in dynamic IT led tornadoes throughout the globe. The interesting thing is that not a one of them (outside of some of Broadcom's components that go to the consumer mass market) involve a mass market consumer appeal such as Microsoft, Intel, Qualcomm, Gemstar, Palm and the companies that form the value chain around those types of mass market high technology plays. They all involve a mass market IT as well as business mission critical let tornadoes. Likewise, the PC has been and is involved in the same IT led via the corporate, server and enterprise side of the equation. A different kind of mass market, but a mass market none the less. Obviously, the Internet itself is surrounded by both mass market consumer as well as mass market IT led growth. The companies we look for are companies that make the parts, components and put all the technology layers together to faciliate those mass markets. The larger the mass market, the larger the opportunity. That's what we're looking for and that's what will give us the 5, 10, 15, 20, etc... baggers in our portfolios.

I'm going a long way around the bush here to get to your question of any type of mass market high technology play that is currently valued as a small-cap or young mid-cap company under the $10 Billion market cap level. However, I wanted to set it up before I got to that point. Why? Because you are right to be looking in that area. The opportunity for tremendous gains can be found in the $1 Billion to $15 Billion dollar market-cap range. I would even stretch that out to $20 - $30 Billion market-cap, but that's my own preference. The under $10 Billion range has always been my favorite place to look and is where Dell, i2, Siebel and others were found. If you think of each of those companies in terms of mass market appeal, you understand in retrospect now what kind of mass market they were aimed. It's nice to say that the computer was a consumer mass market focus since we all use one, but in the case of Dell - they were and have been IT focused. We understood it better, because our fingers have laid themselves on keyboards and are personal experience with computer use understands what a 'box' is and what 'Microsoft/Intel' mean to that 'box'.

It's more difficult to wrap our 'experience' around something like CRM or SCM where Siebel and i2 carved out their initial niche markets. How many of us can sit around and chat about algorithms, software code and enterprise front and back office if we don't have hands on experience or face some of the products from time to time? What about a 'box' which is the term used in IT for infrastructure equipment like routers/switches. I had the luxury of seeing some this past summer at Redback and as far as I could tell you - it's a big 'box' with so much spaghetti plugged into it that it humbles my experience as being successful getting my VCR, satellite box and television hooked up in a proper manner. How can I sit around and talk about that? We could go through all of high technology and encounter things we simply don't have 'hands on experience' or knowledge about. That's why I subscribe to IT Trade journals, newsletters, venture capital mailings and spend a lot of time reading and trying to put it all together to make 'sense' out of it all. Does it help? Well, it at least takes away some of the fear and presents ideas that might lead to mass market potential in IT led tornado activity. The consumer mass market is easy for all of us to read. Be it Sandisk with digital photography, Palm with their products, wireless phones/devices, interactive television programming guides and the consumer products of Gemstar - we can see them, use them, take them apart and live with them.

I should also mention that as you dig down into some early, young companies that have a technology that may have mass market potential the rate of risk goes up that the technology or your investment may be a big belly flop into a pool with no water in it. There are ways to avoid that by sticking to something backed by the most visionary VC firms that don't bother wasting their time and or resources in projects that don't pass some strict criteria. Couple that with the reality that these days, the most interesting start ups hit their IPO's above the market cap of a $1 to $5 Billion in the first uptick on day one of trading. That's frustrating, but is a reality in today's times.

You won't find much in the way of confirmed 'gorillas' below $10 B in market-cap, but you will find interesting candidates in both potential gorilla games as well as royalty games that do have mass market potential. I have done some research and am following some companies that 'appear' to have some mass market potential - be it in the IT led or consumer led tornado arena. I continue to do research on all of these and as a disclaimer, hold shares in some of them. These are not recommendations, but simply an illustration for the types of things I look for in the early going to weigh the risk, the potential and the competition in the space for viability. They're certainly not secrets at this point, but they are below the $10 B in market cap range or not yet a public company. Sonus Networks. Wind River Systems. Maple Optical. Cree, Inc. Sandisk. Finisar Corporation.

I have a list about as long of private companies that should IPO in the next year with equally promising 'potential'. We could also look in the software market at smaller companies like Broadvision, Vignette and some private companies that I listed on the GG board a while back that could possibly be in a gorilla game. Yet, I haven't completed my 'formal' study of their emerging technology yet. I'm a little more 'up to speed' on the six companies in the previous paragraph. Each carries it's own risk/reward scenario and I would highly suggest learning those before even considering a dime of my money being invested. I take small capital risks when I invest in small-caps. Be it 100 - 300 shares or be it a set amount that I determine is my 'gut check' point of no return if the belly flop into the pool without water happens. I do the same in non technology small-caps. In addition to Dell, i2 and Siebel some of the other small-caps in the past decade that I have invested and either enjoyed success or took the big belly flop in the pool include Southwest Airlines, Charles Schwab, Harley Davidson, York Group, Callaway, Broderbund, Covad, DoubleClick, Micron Electronics, Read-Rite, Wendy's, Tricon Global, Tiffany's, Analog Devices, Iomega and I'm sure a few others that I've thankfully forgotten. Even if some of those have been flops, the winners have more than made up for the flops. That's a risk with small-cap investing and one must understand it.

I hope that some of that at least addressed the 'types' of things that one should be looking for in the early stages and the risks involved of losing $10K per issue, or 100 - 300 shares going to zero, getting cut in half as well as being bested by a CD paying 4% or 5%.

Maybe the risk/reward scenario improves as you move up into mid-caps, but a company like a Juniper, a Redback, an Extreme, etc.... target a mass market IT level that does provide potential. Perhaps not one where the market cap is going to increase by a factor of 2, 3, 4, 5, 6, 7, 8, 9 or 10 times overnight or even ever. However, the potential for becoming a dominant company in the IP/Broadband space, enjoying the rewards of a CAP awarded to such a company and the network effects of what such a company can enjoy holds interest for me. I keep a mix which I call the 'age mix' of small-cap, mid-cap and large-cap in various industries. Obviously, you are aware of my decision to unwind my Dell, Microsoft, Lucent and Worldcom large-caps in favor of repositioning the money in the 'mix strategy'. It's costing me an arm and a leg in taxes and will probably take another 5 years to see if the transition was way off the mark or if I even break even let alone profit. I'm not considering the shorter term where Dell, Microsoft, Lucent and Worldcom's share prices have been hit so hard since my sale at the end of December. I couldn't have predicted that just as I couldn't have predicted the rise in some of the younger companies like i2, Siebel, Brocade, Extreme, Juniper, Redback, Network Appliance, Broadcom, etc... .

Being that the Internet is still so young and early in its cycle, this first wash out wave will probably give rise to stronger companies rising up and an entire series of companies that utilize the Internet in some manner that will provide plenty of opportunity for investors going forward. We just have to be wise and study the business models and mass market potential. It is there and those companies will come to the fore over the years.

BB


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