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No. of Recommendations: 27
I enjoyed Richard's RM article today even though I disagree with his bottom line assesment that the purchase of JDSU was a mistake. I bought JDSU several months before the RM port did. I experienced a tripling of my investment $$ followed by a ~60% nosedive and hung on. I maintain that JDSU continues to be an excellent albeit high risk long term investment. The short term prospects have been dimmed by the slowdown in telecom capital spending. Keep in mind that at the time the RM port purchased JDSU revenues were growing at over 100% year over year and the company was pouring all of its earnings into "goodwill" acquiring companies with complimetary technology in an effort to scale up production to meet demand. The expectation of that kind of growth continuing became priced into the stock.

There are several lessons to be learned from this experience.


1) The price you pay is important.

A company whose revenues have just grown by 100% but whose share price has grown by 800% should raise red flags. This was the case for JDSU as 1999 came to a close. Any traditional "valuation" method is probably pointless in a situation such as this. The unpredictability of future growth constitutes risk. Unfortunately for the RM port they waited until the price rose by another 200% while revenues continued to grow at an amazing 100% annually. It doesn't take Ben Graham to realize that the RM port didn't buy this one cheap.

2) The financial health of the customer is important.

One reason the RM port focuses on mass market companies (MSFT, KO, PFE) is that the consumer is the customer and therefore unlike B2B companies they are less apt to get hurt by the loss of a single large customer. This is NOT the case of JDSU. They are dependent on continued orders from telecom/networking companies. When these companies start getting overleveraged and/or seeing slowed revenues they spend less on expansion...This complicating factor makes analysis of JDSU much more difficult.

3) The market is irrational and inefficient in both directions.

The day after day after day 20 point gains in JDSU made it the darling of mechanical screens and the momentum investors of 1999. The price got way way way ahead of any reasonable expectation of near term earnings: irrational exuberance! Then while revenues continue to grow at a healthy clip and debt remains trivial the companies share price gets slaughtered because of a slowdown. Note that this is a slowdown in growth not a loss!! Note that the rate of growth that one started from was astronomical!! Nevertheless the mo-mo's got out and JDSU fell out of all the MI screens. The price tumbled further. JDSU's price is becoming more and more attractive. Perhaps the RM port managers should have been patient and waited for a better price.

4) Know your strategy.

There are a lot of companies out there that will make investors money. Lots of those companies are not Rulemakers. Most of the companies that are not rulemakers are more work to follow than KO, GE, PFE etc. When I bought JDSU it seemed to be more of a rulebreaker, an emerging first mover in a "hot" industry sector who the pundits were calling overpriced. I bought it as such feeling that it was my highest risk investment to date. It has never "scored" in the top tier on the RM ranker even when using pro-forma earnings. I felt I could take the risk with JDSU since I had 10 other stocks that were clear cut rulemakers. I knew that I could only lose the initial $2000 I put into this one but could make many fold more than that if it lived up to its promise. Following JDSU is work. I spend more time keeping track of it than any of my other companies. I feel I can't afford to get behind because it is a high risk investment.


I still think that this is an excellent well-managed company that ought to reward investors highly in the coming years. I will hang on for the long term unless something fundementally changes for the worse in its management or business model.

Mark
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