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No. of Recommendations: 5
Chris, thanks for pulling some of those things together and mulling over the telecom capex issue.

One thing bedeviling the discussion, I think, is that Sagawa essentially said some higher-priced optical stocks were over-valued. This could be true regardless of the specific consensus growth outlook, since valuation multiples can and sometimes do change independently of any growth forecasts. So it wouldn't be hard to grant that perhaps some high-flyers were richly priced, whether one bought the overall Sagawa forecast or not. My own take on Sagawa's analysis was: correct about over-valuation, but probably quite incorrect about growth picture.

Sagawa says he accounted for habitual telco low-balling of future capex spending, but perhaps he didn't compensate enough.

I try to read all the readily available reports on the subject, but stepping back and being logical about it, it's not hard to reduce the picture a bit to the key things I care about as a LTB&H telecom equipment investor. Trying to sort out the ultimate merits of conflicting forecasts --- all of them subject to a robust range of error --- seems pointless, not to mention infeasible.

My investments in the sector are based on the premise that the best companies involved in the new telecom network infrastructure build-out will face sustained and superior medium-long term market opportunity and growth prospects relative to most other sectors. Clearly not the only sector like it, but one of the biggest and most certain to experience a prolonged growth phase.

It's perfectly normal for there to be bumps in the road, whether caused by sector distortions (overly ambitious build-out plans, or schedules, business models that don't match revenue needs in changing financial climates, etc.) or overall capital market problems. If Sagawa's thesis about revenues not supporting capex growth rates proves correct, it will only be correct for a brief period (as viewed from a longer term perspective). The underlying, prolonged trend will not likely change: a massive, global, multi-faceted infrastructure investment and upgrade effort that presents huge opportunities for the best vendors.

But even though I'm comfortable with the sector fundamentals, long-term, there's endless variety to the ways in which particular stocks can swoon or soar, in the short term.

Take NT. One of my largest positions and an old one (long before the optical stock mania). I sympathize with those less fortunate whose cost basis is higher, but the happenings since NT's 3Q announcement have been almost comical. The analysts keep moving the goalposts. A very vague comment by John Roth becomes a "forecast" that must be met by NT. Spectacular, nearly unbelievable growth numbers are deemed to have fallen short in some way --- even though they confirm a market dominance that none of the analysts had predicted. When the company reiterates their unchanged outlook for a third time, somebody, seemingly almost in desperation, invents yet another new benchmark (implausibly huge number, with no official basis at all) that NT had failed to meet.

I don't know what's going on with these people, and I don't much care -- nothing they've come up with has altered my conclusion that in the years ahead the market will reward NT for its continued success (assuming they execute). None of which is to say that NT wasn't ahead of itself --- probably was.

Sagawa's forecast didn't give any reason to modify our view of the longer term trend. So even if, against the evidence, he proves correct, it's not of great concern (unless you're planning to cash out your optical stocks in the next 12 months and live off the proceeds).

Sorry for the ramble. Thanks for your contribution.




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