The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment.and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn.and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
UT Starcom Inc. (NASDAQ:UTSI)
Alameda, Calif.
$12.73
52-week low-high: $12.39-$32.15
$1.4 billion market cap
By Dave Mock
Fresh off of handing Geron (NASDAQ:GERN) its opening-round loss, UT Starcom now faces more a much more seasoned rival, Cisco Systems. So how do you go from playing a team full of first-season rookies to one that's stacked with veterans?
You tap into your strength, stay focused, and remember that even a giant has its Achilles heel. And when I step back and look at this matchup, here's what I see: UT Starcom is a company of the future; Cisco is a company from the past.
Sure, Cisco investors have made a bundle, and there's lots of opportunity in front of the networking giant. It has a huge brand, extensive development resources, and consistent cash flow. But that doesn't make it a better investment today.
Cisco currently boasts a P/E of about 22, but sales have been mostly stagnant of late, and research and development spending hasn't budged in years. Not exactly your ideal growth candidate. The market agrees, and the stock has been in a downtrend over the last 52 weeks.
Now UT Starcom shows a pretty miserable share price chart over the last year as well -- nothing to brag about here. But the reasons for the share decline are much different. Over the last year UT Starcom has had a tendency to disappoint when it comes to meeting projected numbers. The market doesn't take kindly to this, of course, and so here the company sits at a P/E of 10.
That's right, 10. For a company with 100% revenue growth.
Could it be that the market has overreacted about UT Starcom's missteps? Maybe. After all, the company is in the midst of a major integration effort with Audiovox and significant product and market shifts.
I'd argue that Cisco's best days -- as an investment -- are behind it. The heady growth of the 1990s is over. UT Starcom, on the other hand, is a revamping telecom tiger that has only scratched the surface of some major new global trends. Admittedly, this makes UT Starcom a more risky play, but also one that offers more potential upside.
Fool contributor Dave Mock does not like green eggs and ham, Sam I am. Not in a box, not with a fox. He owns shares of UT Starcom.
Cisco Systems (NASDAQ:CSCO)
San Jose, Calif.
$17.92
52-week low-high: $17.13-$24.83
$115.6 billion market cap
By Tim Beyers (TMFMileHigh)
Dave's right: Ciscois a far tougher opponent for UT Starcom. And he's not the only one who thinks so. Follow me to Yahoo! Finance. Put in UT Starcom's ticker -- UTSI -- won't you? Now, see that menu on the left side of the screen? Yes, there. See "Key Statistics"? Please click there.
If you scroll down, you'll see on the lower right side UT Starcom's short interest, which, as of this writing, stands at 15.22%. That means a full 15% of the people who have a stake in UT Starcom think the profits are in the stock going down. Allow me to repeat that, because it's incredibly important: These investors have bet a portion of their savings on UT Starcom's stock losing value.
For perspective, consider that struggling telco Qwest (NYSE:Q) has only 7% of its shares sold short. Not even LexarMedia (NASDAQ:LEXR), which is competing as a short candidate in this tourney, matches UT Starcom's short interest. Why listen to the shorts? Because their losses can be infinite. To hedge against that outcome, they typically research their picks very carefully.
Let's assume for the moment that the shorts are wrong. Is UT Starcom undervalued compared with Cisco? Check Yahoo! Finance again. The price-to-earnings-to-growth ratio (PEG) for UT Starcom is 1.69. Cisco's is 1.26. That means UT Starcom trades at a hefty premium compared with Cisco when considering the projected growth of both firms.
And then there's the cash flow. UT Starcom has had negative free cash flow over the trailing 12 months. Cisco, on the other hand, generated more than $7 billion in free cash flow over the same period. Isn't it difficult to take advantage of global trends when you're burning cash to stay in business? I'd say so. The smart money appears to agree, and they're voting with their dollars. And that's why Cisco is the better bet.
Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile.
Rebuttals
Tim gets credit for drawing a stalwart networking company but falls victim to greatly oversimplifying this competition. First, short interest is a herd-mentality metric -- Fools aren't lemmings who follow a crowd off a cliff. Second, stereotyping UT Starcom as a loser akin to Qwest just because it's a "telecom" shows superficial judgment. Yeah, eBay, Amazon, and Yahoo! were just dot-com losers too. Simple metrics can scare investors away from huge upside opportunities. -- D.M.
You said it right, Dave: UT Starcom is more risky. It's also overvalued on a PEG basis. Plus, the company can't make its projected targets. Isn't that like a team that can't hit free throws? Finally, why are we even talking about growth and telco? This is a market that features lots of losers. UT Starcom may be the best of the worst, but that shouldn't be enough to win this contest. -- T.B.
Who won? Click here to cast your vote.
The Motley Fool is investors writing for investors.
