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In response to the latest Rule Maker essay questioning the portfolio's decision to buy JDSU, and arguing why it shouldn't buy more JDSU:

This sentence caught my attention:
"This means that we must believe JDS will double its market value in five years, or become roughly a $200 billion company by 2006. Based on the company's cash flow at this point, that's not a good bet for the Rule Maker Portfolio."

Maybe what he's really trying to say is that when the Rule Maker bought JDSU at $100 a share, they needed to have believed at that time that the company could double from it's then-market cap of $96 billion or so to around $200 billion in five years. (He seems to think that is improbable; I don't, even now.)

At any rate that's not what he said -- he expressed it in present tense. But to double from it's current $43.5 billion market cap within five years, JDSU would only have to reach a value of $87 billion, a near certainty in my mind (just 20 percent annual growth would double the market cap within in four years, and JDSU would have to seriously fail to execute to avoid growing its profits twice that fast -- even with some multiple compression, the stock price should tag along at 20 percent CAGR).

If it was a mistake, nothing can now be done about the portfolio's decision to invest in JDSU early last year. That decision is irretrievable. But if the purpose is to evaluate JDSU as a candidate for future investment of Rule Maker dollars (it SHOULD be, shouldn't it?), the fact that the port previously bought the shares at a higher price should make no difference whatsoever to that decision. They should consider it with fresh eyes.

I think the question should be whether JDSU shares are a reasonable investment at the current price. I think the answer to that -- including the 2x5y metric -- is a resounding yes, and I think the Rule Maker risks compounding what it perceives as a previous mistake with another mistake now, this time one of omission.

And one more point: The business is generating tons of cash, but that cash is being aggressively plowed right back into capacity expansions. For long-term return, this is exactly what shareholders should want the company to be doing as it seeks to cement its dominance of an extremely exciting industry. And we owners should also be glad the company is able to make substantially all of these massive capital expenditures out of revenues, without sinking the company deeply into debt. Presumably, this capacity expansion will be able to slow down the road, leaving a lot more of each quarter's revenue as "free cash."

I'd love to hear your thoughts, everyone.

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