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Author: igodard Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27  
Subject: KAB: Reposts from 11Wall (part 9) Date: 12/15/1999 9:56 AM
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The message below and the following discussion was posted at http://www.11wall.com and might be of interest here.

11Wall is a moderated discussion board. As such it has no spam or flame wars and is generally civil and thoughtful. You might visit if postings like this interest you, whether you agree with them or not. I don't read here, so please post any responses at 11Wall.
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Easy: KAB P/E..

The Wall Board: Stocks (Misc): STOCKS NOT OTHERWISE LISTED: Easy: KAB P/E..

By Igodard on Tuesday, December 14, 1999 - 06:35 am:

[Just why is it selling at less than 6X earnings? I can usually find some reason,
even if I think it's a bad reason, for a stock being so depressed. Couldn't find any
half-way convincing reason for KAB. But there's got to be something! ]

The easy answer is the Observer Effect, more commonly cited in cosmology. It is trading at
6X because I wouldn't have mentioned it at 20X.

The less flip answer is because it is treated like a pipeline company, and moves at the same
valuations and for the same reasons as they do. The market considers pipelines to be
income vehicles with zero growth prospects (after all, they are already full), and so price
them relative to interest rates.

In addition, the pipeline sector is down because the USWS is predicting a mild winter with
lower heating oil sales. To show you how dumb the market can be, even pipelines that carry
water, liquid sulphur, and high fructose corn syrup tend to track the heating oil spot price.

I don't consider KAB to be a pipeline, and I don't think management does either. So long as
the market does, I am content to hold it at the present PE and take the solid earnings growth
and the terrific defensive price. I consider a spike in interest rates (which would send all
income stocks down) unlikely enough that I don't even hedge the KAB with interest futures.

Eventually the IS sector of the company (100% growth) will dominate, somebody will start to
notice, and the PE will move to track the tech stocks. Or maybe management (sharp cookies)
will take the IS division out in a tracking stock or spinn off - look at MMWW today. I will
probably sell then, because I do expect a panic sometime and it's the techs that will be hit.

What if nobody notices? Here's an idea I got from TC: I'll tell them :-).

Ivan
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