Message Font: Serif | Sans-Serif
 
No. of Recommendations: 5
Mr. Mann,

This is in response to your piece regarding the selection of a new Rule Maker among the telecom market leaders. My reaction is to your analysis of Qualcomm, which I thought was no less misleading than Mr. Piecyk's price target of $1000 and his analysis of the company which you applied yourself at destroying.

Let me first introduce myself. I am a 34 yr old Canadian, and I started investing on the stock market in 1994, around the time when the high tech sector was really starting to pick up. Initially most of my investing was in small caps, companies with high momentum which I often traded on a daily basis. I made a lot of mistakes and lost a lot of money, and eventually I realized that I didn't have the tools nor the time to do well well as a day trader. So I switches strategies. Since January 1996 I have become a buy-and-hold type of investor, and my annualized rate of return (to Dec 31, 1999) has been a very acceptable 63%.

This is to say that I am not a complete newcomer in the investment world, I have made my mistakes and finally found a strategy that works for me and which I believe mirrors the Fool's strategy which I discovered a few months ago. I basically invest in companies that meet your rule making criteria (Cisco, Microsoft and Intel are 3 of the 10 companies I own), and I plan to hold them forever or until such a time when they will have lost their relevance.

Qualcomm is the lastest addition to my portfolio, of which it constitutes 20%. I bought my shares of Qualcomm at a relatively late stage of its stock appreciation: $120 after the split of 4 to 1. I did my homework, studied the company from inside out, even talked to people who work for the company, and I finally decided it was a worthwhile investment for the (into the) future, even at such a price. It is interesting that my analysis of the company is so conflictual with yours.

I am not sure where you obtained your data on market penetration of cellular phones, and I don't have any data to compare, but I will say this: as an environmental consultant I travel throughtout the developing world advising governments on how to better manage their natural resources. I happen to know very well the 3 countries you mentioned in your article (India, Bangladesh and China), as well as most sub-Sahara African countries, and the one thing that strikes me evey time I visit one of those countries is the incredibly fast spread of cellular phones.

Recently I was on assignment in a little central African country called Uganda, and while there I did something I had sworn I would never do: I bought a cellular phone! Why? Because of the 50 or so local workers in the institutions where I was seconded, I was one of a handful who did not own a mobile phone. I felt compelled to buy a phone not in Canada, not in the US, but in Uganda, because every one there seems to have a mobile phone! Because business life in those countries demands it!

Bangladesh is a very interesting example. To your immense credit, you and your Foolish colleagues have done well in publicizing the enormous achievements of Mohammed Yunnus and his Grameen Bank. Then you must know that My. Yunnus' idea of the next social and economic revolution is to bring the cellular phone to every household in the country!

It doesn't stop here: recently I have spent 3 months in Switzerland - every single household that I know has a mobile phone! For a while I thought this was a Swiss phenomenon. It's only when I crossed over to France and Germany that I realized the extent of this technological revolution. It is a European phenomenon, a worldwide phenomenon, and if there is one region in the world where market penetration is lagging, it is North America!

Like you, I do take Mr. Piecyk's assumptions with a grain of salt. His analysis of Qualcomm and his price target of $1000 are not what led me to buy Qualcomm (obviously not since I had made my investment before his statement came into the news), and I am quite sure it is also not what has led most investors to buy Qualcomm shares. I also did not buy the company only because of the stream of royalties which are to flow into the company's coffers over the course of the next few years. As a buy-and-hold type of investor who cannot afford to spend time following his stocks on a daily or even weekly basis, I am not prepared to bet that Qualcomm will be able to maintain its competitive edge only with CDMA. I bought the company for the same reason that I bought Cisco, Microsoft and Intel. I bought it because of its top class management (how often in the past few months have we heard Mr. Jacobs' genius being compared with Bill Gates'?), because of its enormous capital wealth and zero debt level, and because of its many other business strategies (besides that of spreading the CDMA technology to all corners of the planet) to expand into new areas and improve its already superb technology which this capital wealth is affording the company's management.

Your article almost assumes that the company plans to rest on its laurels and simply hope that the rest of the world is going to adopt CDMA as a wireless standard. You made no mention of the company's plans to expand horizontally. You made no mention of the fact that building chips for cell phones are not the only area of interest for Qualcomm.

I find particularly irresponsible and foolish (in the literal sense of the word) of you to affirm that Qualcomm has a 30-yr growth target which is already built into its stock price. Not only is it strange to read such a thing only a few months after your team decided to invest in a stock (Yahoo!) with a P/E ratio 5 times (2,600) that of Qualcomm's today, but if you'd taken the time to really get to know the company before writing about it in such irresponsible and foolish terms, which you obviously did not, you would know that the senior management's time horizon certainly does not exceed 10 years and that they also have many shorter term horizons built into their business strategies for various parts of their business.

Why do I bother to write? Is it because I am worried that an article of the sort you wrote might hurt the stock price and my investment? Not at all, and in fact I would be quite happy if the stock went back down as this would enable me to buy some more shares. I am writing simply because after months of being presented with wonderfully pertinent and valuable articles by the Foolish Team, including yourself, and learning to trust and value the Foolish Team's insight and opinions which I have shared with many, I am suddenly confronted with an article which betrays that trust.

Like I said, I do not agree with Mr. Piecyk's analysis of Qualcomm, and if many investors have been influenced by his opinion, I am convinced that most who bought Qualcomm shares did it because they truly see it as a company of the future. Yet, to his credit, Mr. Piecyk probably put his money where his mouth his, therefore I can excuse his irresponbility. You have no excuse.

Foolishly yours,

Bruno Francois




Print the post Back To Top
No. of Recommendations: 8
Dear Bruno Francois:

This is a pretty powerful rejoinder. I appreciate that you did not stoop to the level of accusation as to my motives i.e. selling short Qualcomm. It would take an absolute adrenaline fiend to short a company with movements like we have seen in Qualcomm's share price. Nope, not interested. So what's my excuse? I am an investor writing for the benefit of other investors and for myself. And you know what? That is sufficient.

Let me work backwards on your letter. First of all, I have not disclosed my position on Qualcomm, nor do I intend to. But I will say that I have a past tendency of being harshest on companies that I own. For example, CMGI is perhpas my favorite company I own, and yet I have no problem hammering the company when they operate in a fashion that is outside of what I believe is the best interests of long term shareholders. Qualcomm just happens, by inaction, to have triggered that same response in me.

Think about it, it's pretty much fish in a barrel to complain about the Rite Aids and Fruit-of the-Looms and similar dreck of the business world. But a company with a bang up product like Qualcomm, one can look at such a run up in price as a validation that it has already succeeded. I think that we can agree that with companies such as Yahoo and Amazon that this is not the case, so why should Qualcomm be different?

So you speak from the position of an environmental consultant who operates in the third world. Let me tell you about the basis of my expertise. I co-founded a company that provides private wireline, wireless and satellite links for data and telecommunications services throughout the third world. In this time I've met with the government and business leaders in developing countries throughout the world who were in the process of determining how best to provide advanced telecommunications services in situations where the monopoly phone companies are completely unable to provide sufficient service and bandwidth. I've walked these grounds- I've spoken with officials about CDMA, I've installed cellular facilities in Indonesia, India, Pakistan, among other places. I know the business, sir, and not from the position of feeling the need to carry a cell phone in Uganda.

Now, if you pay really close attention in the article and remove your emotional reaction you will see the primary point of my elimination of Qualcomm as a Rule Maker. (and by the way, those numbers you rightly derided came from the PW buy report). What I say is that with the information we have now, the expected growth rates assigned to Qualcomm's existing technologies are aggressive. But unfortunately for the company, the majority of that growth is NOW built into the price of the stock. This has NOTHING to do with whether Qualcomm will succeed and everything to do with the fact that the company is now valued as if they already have.

I think (and I said so in the article) that CDMA is an awesome technology. I sat in as engineers were pounding the table about the superiority of CDMA to the Indian Telecommunications regulatory authority more than 4 years ago (and by the way, the governm,ent ignored them and elected to go with GSM). But I am not willing to specualte on Qualcomm's ability to leverage it's current revenue streams with additional, as of yet unknown and undeveloped technologies. Does this mean that I believe that they won't? Not at all, but attaching that type of premium to a company is speculative, and not in tune with Rule Making.

Your point about Yahoo is an excellent one. I'd only point out that a) I disagree with its current valuation as well, and b) continuing to hold an overvalued stock is quite different than purchasing it. The level at which one buys is the margin of safety I personally look for. Yahoo has none at this level. Neither does Qualcomm. Don't confuse the lack of safety with a belief that the company cannot continue to grow.

But the thought (and you've been around the track, so you can recognize the ludicrousness of this assumption) that on average one out of every two people (not households) will buy a new CDMA enabled phone at a price of $180 in the year 2010 in the year 2010 is, well, it's aggressive. We're looking now to get to a point where there is a phone and connectivity in entire South Asian villages, much less familial or individual ownership of telephony devices. This argument goes back to a basic point I made in the article, that the infrastructure companies are the ones that are flat guaranteed to be participating, and in mobile telephony, the leading infrastructure provider is Nokia.

That's my excuse. I commend you on your selection of Qualcomm as well as the other excellent companies you mention- very Foolishly selected. I just understood a long time ago that there are no called strikes in investing. If the RM does not invest in Qualcomm and we are wrong, c'est la vie. But if we invest in it and we are wrong, then we feel the pain of our bad decision.

Fool on!
Bill Mann
"Snakes. Why did it have to be snakes?"
-Indiana Jones
Print the post Back To Top
No. of Recommendations: 0
Hi Bill,

I, for one, actually took your QCOM article to heart. However, it raised another question: the valuation of i- and tech stocks in general. You state:

"Your point about Yahoo is an excellent one. I'd only point out that a) I disagree with its current valuation as well, and b) continuing to hold an overvalued stock is quite different than purchasing it. The level at which one buys is the margin of safety I personally look for. Yahoo has none at this level. Neither does Qualcomm. Don't confuse the lack of safety with a belief that the company cannot continue to grow."

That leads me to my question: How is continuing to hold an overvalued stock different than purchasing it? I thought that the goal of investing is to appreciate one's portfolio from the "present" into "the future." Don't both options present the same opportunity cost and risk?

Respectfully,

SteadyTeddy
BigDidge

Print the post Back To Top
No. of Recommendations: 0
That leads me to my question: How is continuing to hold an overvalued stock different than purchasing it? I thought that the goal of investing is to appreciate one's portfolio from the "present" into "the future." Don't both options present the same opportunity cost and risk?

I don't want to usurp Bill's place in answering this question, but I thought I'd add my .02 FWIW.

If you purchase a stock which later becomes--to your mind--over-valued, you may want to hold it for a variety of reasons. First, the market might disagree and push the stock higher. Second, the market might agree and the stock price could stagnate or fall. In either case, eventually become "fairly valued" again(through continued growth, in the case of price stagnation). If it stagnates, you contine to sit on your gains, and if it drops...well, hopefully it won't drop below your original selling point. Obviously, if you thought you could tell precisely the moment that the stock would be fully-valued, then you would sell when it hit it's maximum over-valuation and buy again the moment before it started appreciating again. Unfortunately, "buy low, sell high" is rarely that simple.

When buying a stock, OTOH, your cost-basis is much higher if you buy when you think a stock is over-valued. Then if the stock price stagnates, you have no gain over a period of time; and if it drops, you immediately start losing money. So holding a stock makes sense because you have more cushion than buying a stock that you think is over-valued, expecially if you are wrong in your prognostications at any point.

FoolRM
Print the post Back To Top
No. of Recommendations: 0
Hi Fool RM,

First, I don't believe in market timing relative to a stock purchase. But if you have a choice of keeping what you believe to be an "overvalued" stock or buying what you believe is an "overvalued" stock, why not opt for door #3 and just buy a stock you believe is fairly priced?

Net/net, I still don't see the difference in risk when someone believes a stock is overvalued. If you keep, say, $10,000 in an overvalued stock currently in your portfolio, the downside risk is the same as if you buy the same "overvalued" stock. The only difference is the taxes you may (or may not) pay on the eventual gain on sale.

The risk is the same, because your portfolio's value at the time of the transaction is the same.

Respectfully,

SteadyTeddy



Print the post Back To Top
No. of Recommendations: 1
Billy:

Don't sell Sonera short. I've looked into some of there venture capital activities and they have a couple stellar plays you failed to mention.

1) They own about a 8% interest in the VoiceStream to be after its merger with Omnipoint and Aerial. They paid about $57.00/shr. They presently have close to $800 million unrealized gain in this investment.

2) They own about a 14% interest in Powertel, which also has a significant gain. Speculation is, VoiceStream will acquire Powertel somewhere down the road.

3) And if that is not enough, Sonera recently made an investment in Advanced Radio Telecom Corp. (ARTT). I haven't seen any details yet.

In short, I'd say Sonera is quietly invading the US and few know it.

4) Oh ya, here's the icing on the cake. Sonera owns 21.8% of 724 Solutions a soon to be IPO. They develop software for on-line banking via digital cell phones. Considering Citigroup and Bank America also own a piece of 724 Solutions, I'd say this little company has a chance of making its mark. BTW, did I mention Sonera BOT its shrs for about $3.80. Tidbits indicate the IPO will be priced $11-$13, but we all know how that goes. If it prices at $12, Sonera is already sitting on a triple. Their investment is just over $24 million, but large oak trees spring from little acorns, if you know what I mean.

Taken together, the national footprint of VoiceStream and the 724 Solution for online banking, well, I think you get the picture of where Sonera is heading, or at least where it is putting its investment dollars.

Put this in your model the next time you want to kick Sonera around. It will give you another $3 billion to be foolish with.

Regards,
Print the post Back To Top
No. of Recommendations: 0

Hi Bill,

Agree fully with you QCOM is overpriced. But I miss one detail which I belive is the most important one.
If you think that QCOm will receive 4.5 % of all of the predicated 85 % CDMA ( WCDMA, CDMA, CDMA2000 ) phones in the future you are totally wrong.

The majority of these terminals will be based on WCDMA
( 85 % ) and here QCOM has no more patent than Ericsson and Nokia !!

QCOM might have patent for soft handover in IS-95 but they for sure don't have it in WCDMA. No way !!

So if I would by a company for collecting patant I would buy Ericsson and Nokia and as a hell of a large bonus I would receive the largest Infrastructure and Phone supplier in the world.

wave
Print the post Back To Top
No. of Recommendations: 1
But if you have a choice of keeping what you believe to be an "overvalued" stock or buying what you believe is an "overvalued" stock, why not opt for door #3 and just buy a stock you believe is fairly priced?


BigDidge/SteadyTeddy--

I agree that door #3 is a better option if you believe it is a better place for your money--but then that would be true regardless of valuation. I guess I'm less comfortable saying "this is a great company that is overvalued" to a new investment than I am saying "this is a great company that has become overvalued", but I admit the distinction is tenuous. I think that is why the Rule Makers always say that quality is more important than value.

FoolRM
Print the post Back To Top
No. of Recommendations: 24
My TMF friend,

"The majority of these terminals will be based on WCDMA
( 85 % ) and here QCOM has no more patent than Ericsson and Nokia !!"

100% WRONG!!!!!
Dr. Irwin Jacobs has clearly stated during conference calls,
that the settlement with ERICY nets QCOM the same royalty
payment no matter what version(flavor) of CDMA used by ERICY.

Thats why QCOM took off like a rocket last March-April.
Sometimes there are real reasons why stocks go up.
I know that this is hard for some to believe when it comes to QCOM.

sure is a nice day
Michael

Q envy causes many sane investors to thrash QCOM, but at least report the truth.
Print the post Back To Top
No. of Recommendations: 1
Hi Bill;
Allow me to enter my 2 cents worth. IMHO your original post about potential Rule Makers in the telecommunications area was one of the very BEST posts I have seen in all fooldom! My compliments for a well written article.
Your comments on Qcom provoked apolexy in the heart of the "Longs" and warmth in the souls of the "Shorts". I am neither long or short. Of course I wish I had bought it about a year ago, so kudos to the longs & prayers for the shorts.
I believe the crux of your article was not Qcom, but the other stocks you mentioned. In fact I have decided to buy one of the others on 1/10/00. My order is in to buy at the open.
Don't be discouraged by the flak! You are one of my favorite fools.
Fool on!!!
Print the post Back To Top