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No. of Recommendations: 6
Whether you are playing Gorilla Games, Royalty,
Godzilla, or Rule Breaker games, we are very 
interested in hypergrowth markets.

I took a look at the long term charts for a few 
companies we all wish we'd bought way back when.  Based
upon price movement and volume pickup, I picked 
realistic entry points for these companies when they
were clearly creating a Wall Street buzz.  I then took
a look at their revenue growth rates at the time of 
the theoretical due diligence period.  Looking over
the 10-K's, it appeared consistent growth over a few
years was very important, as was at least a decent
gross margin.  These companies were basically debt
free too.  I threw down the end of FY Price/Sales
numbers from Quicken's site.


JDS-Uniphase	
October 1998

	Revenue growth  Gross   P/S
Ann-98	175.801	64%	47.6   13.5
Ann-97	106.966	55%	46.3	9.1
Ann-96	69.073	63%	47.5	8.2
Ann-95	42.282			2.4

	Last QoverQ	40%			
	3 yr growth	61%					

Network Appliance
Aug-98

	Revenue growth  Gross   P/S
Ann-98	166.163	78%	59.3	7.3
Ann-97	93.333	100%	55.9	5.1
Ann-96	46.632	215%	55.9   11.1
Ann-95	14.796			2.4
 					
	Last QoverQ	74%
	3 yr growth	124%					

Siebel Systems		
August 1998	

	Revenue growth  Gross   P/S
Ann-98	118.775	203%	91.7	7.8
Ann-97	39.152	387%	94.5   12.4
Ann-96	8.038	1500%	94.7   23.3
Ann-95	0.05				

	Last QoverQ	168%
	3 yr growth	1234%					

America Online		
July 1996

	Revenue growth  Gross   P/S
Ann-96	1093.85 177%	42.6	3.7
Ann-95	394.29	241%	41.7    4.2
Ann-94	115.722	NA	40.3    4.1
Ann-93	NA		
		
	Last QoverQ	121%			
	3 yr growth	NA			



Some comments on valuation - today's P/S numbers 
continue to trouble me.  We have attempted to justify
triple digit P/S ratios today for Nextgen type 
companies growing 100%-500% year over year.  Certainly
Siebel and Network Appliance grew comparatively with
Foundry, Redback, Juniper, Brocade, etc., yet never
commanded such a high multiple.  Are we really in a 
new paradigm?  Or have we overbought some great 
companies and formed the proverbial "bubble."  Enough
worrying.  

I used Netscreen from Marketguide.com to create a 
screen for high growth companies.  Many of these 
companies are in hyper-growth.  For the screen I used:

Sales growth >=40% for Quarter over Quarter, TTM, and 
3 year period.

LT Debt:Equity <=0.1

Insider Ownership >=15%

Price to Sales <=40


Unfortunately I cannot screen for Gross Margin, but
it is easy to reduce the pack via this method.

I came up with this list for meeting the criteria:

TFSM AH BRIO BOBJ CACS CINR CMTO CREO COOL CBXC DFXI
DITC FORR HLIT HLTH IFIN ISSX IIXL LCOS MCTR
MXT MCRL MSTR MNMD NEON ORCT PFCB PRGN PCLE PIXR
PLCM PLMD PDII PXCM RAZF RMDY RFMD SONE SMRA STTS
SHOO SNBC TENF UHCO VNWK WFII WITC ZDZ


This list includes some non-tech companies.  As far
as I know none are involved in Gorilla Games, and
others are second tier players in hypergrowth markets.
But this is a nice starting point for companies which
are growing at lightspeed.

The next step of course is to identify any proprietary
technology driving the growth in these companies.  Or
perhaps identify a category killer or new medium, as
AOL was in the mid 1990s.  Definitely the prototype
Rule Breaker.  Obviously Lycos is growing fast but it
holds no such power.

One company which showed up a few months back and was
looking very interesting is Aspect Development, which
of course has been bought by ITWO.

If you re-screen by removing the 3 year growth rate
requirement, the list gets much longer.  But this also
introduces interesting companies such as Emulex and
Q-Logic.

If anyone would care to discuss any of these companies,
the forum is open.  :)  If you have ideas for changing
the screening criteria I am up for suggestions.

Happy Hunting
DP
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No. of Recommendations: 4
Hi Dan,

Great thoughts. I was reviewing the book this morning and I really liked what Paul Johnson did with the Cisco case study (much better than with ORCL). When the annual growth rate exceeded 100% and the Q/Q growth rate was accelerating, you have a tornado forming (or potential tornado b/c I think other factors are important too). So, you can see it forming!

Using this methodology helps to identify the exact time period that the tornado formed. But, you need a few past quarter's worth of data to see it swirling around. Then, in case you happen to miss the beginning of the tornado, you know the duration of the tornado. According to the book, you don't need to micro-manage things. So, even after the tornado has formed you still have time to analyze the situation and decide what to do.

However, I do not know if there are any screening tools that set up this situation. Unfortunately, Market Guide does not. The data is there, but not in a way in which we can use it for GG purposes. Shucks!

I like your other ideas about gross margins, debt, etc. However, those should be secondary considerations in my opinion. These factors may matter when you are doing some fundamental analysis. It should probably not become a primary consideration when trying to analyze the tornado.

Why? Because these factors could influence your decisions in a harmful way. What the #@$% does TMFFuz mean? Well, based on the theory of complexity (the underlying theory of the Gorilla Game) the winner is formed almost at random. So, the purchasers of the technology may want to analyze the sustainability of the firm they are buying from (e.g. I am buying a router from this company called Cisco that I have never really heard of, are they going to be around in a year?), but they may not have certain thresholds for gross margins or debt or whatever. I would just use other fundamental data with care at this point in the firm's development. Hopefully this makes sense.

And, you are going to still have to look at market share too.

Best,

TMFFuz
John Del Vecchio
Investment Research Fool
The Motley Fool
http://www.fool.com
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No. of Recommendations: 4
One that I follow and like to compare to the original Cisco tornado is Brocade and the fiber channel switching game. Of course, it doesn't hurt that Cisco and Brocade announced yesterday fiber channel over IP and if there were two firms better in the world to follow - I haven't found them yet.

Another one we will all be watching to compare how it unfolds is the business to business space provided it crosses the chasm. The book's examples of the front office game might be a good example as we view companies like Ariba, Commerce One, Oracle and i2/Aspect moving through the B2B technology adoption life cycle.

I know I posted just about everything I'm saying in this post many times before here, but thought I would once again share some recent words from Paul Johnson since TMFFuz brought up his name. This is a post I made on another gorilla board over at SI:

RE: ....speaking of valuations....

After all the chat about valuations, metrics and various ratios - here's an interesting comment from one of our book's co-authors, Paul Johnson, who was on CNNfn yesterday with his 4 stock picks (http://www.hostedscripts.com/boards/stockpicks/messages/246.html) of Brocade, Redback, Juniper and Sycamore:

http://www.tveyes.com/database/expand.asp?ln=1622344&key=brocade

Valerie: All right and last is Brocade...

Paul Johnson: Yes, Brocade. As we move to the Internet, one of the things we've seen is that storage has become critical to all applications and where Brocade goes is what is called a fiber channel switch that allows high speed network coming to the storage world.

Valerie: We have 30 seconds left. We need to say a word about valuations.

Johnson: Most people get stuck on valuations when they're investing and in technology you want to pick the winners, the franchise name and with volatility you'll buy more, but you don't let valuation dictate your investment policy. Buy the best companies. The valuation will take care of itself.

Valerie: It's great talking to you. Paul Johnson, the senior technology analyst at Robertson Stephens.

I wonder how he views the difference in the high prices over the past few months to the lows they hit and the valuation differences were:

Redback - $198 to $50

Brocade - $185 to $90

Sycamore - $199 to the $50's

Juniper - $312 to $150

BB





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1. I'm curious as to why you set your growth rate so low?

2. With regard to your list, and not to the names that are regularly tossed around, you may also want to look at cash flow and the ability of the company to survive until earnings begin to turn positive.

3. I agree with the comment regarding market share. It may not be easy to find, but one can always call the company and ask.
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<<I wonder how he views the difference in the high prices over the past few months to the lows they hit and the valuation differences>>

Geoffrey Moore said:

It is critical that we never disconnect equity investing from financial instrument investing. Remember that in both cases the underlying instrument is valued as "the present value of its future returns discounted for risk." The difference with a growth stock is that investors temporarily forego receiving their present returns, preferring to reinvest them to gain an even higher rate of return some time in the future. As long as the perception is that the pie is getting bigger, it is better to be in equity because of its ability to grow bigger (something a bond does not have). But eventually the equity must "pay off" at this higher rater of return.

What makes this very confusing is that a stock never exists in the present. It is always a bet on a future outcome. In an important way stocks only exist in the future, not in the present. This can set your head spinning, but it is deeply and fundamentally true. Practically, it turns out not to affect buy and sell decisions in any new way, but philosophically it is a biggie.


Add to that a comment made by briefing.com regarding the speed with which momentum investors run up shares to levels that represent value at some distant point in the future - "Why buy a ticket to New York if you're already in New York? - and you have to at least ponder the wisdom of jumping in at any old point and hoping that everything takes care of itself.
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No. of Recommendations: 101
Fools,

With regard to how one might view the highs versus the lows, I have included what I think is an excellent investment strategy used by IPS funds. I am pretty much convinced after viewing their site that they follow the same underlying principles of the GG (not explicitly however). Number 8 below responds to the question of price ranges.

1. Focus. There are too many companies in too many industries to cover them all. In fact, investors should avoid most industry sectors. They display narrow and unpredictable profit margins, low growth rates, zero sum economics, little control over prices and profit margins and intense, cut-throat competition (metals, restaurants, retail of almost any kind, autos, chemicals, transportation - I could go on, but you get the idea). Why on earth would an investor want to own stock in these industries? Especially when other sectors offer predictable, high profit margins, control over prices, rapid growth and insensitivity to economic cycles.
Focus on disruptive technologies, as defined by Clayton Christensen. These are areas where a new technology is getting ready to overthrow the established companies in its sector. The steam engine was a disruptive technology. So was the printing press, agriculture, the electric motor, internal combustion engines, the telephone and computers. You must always ask yourself, what new technology and company is getting ready to trash what I own. Focus on the new, the disruptive, the stealth developments that the established companies do not understand the market or use for. That's often where enormous value is added.

2. Market share rules. In an industry with a new or immature technology, the learning curve all but mandates that the company with the largest market share will develop a natural monopoly. Only a major miscalculation by management (Apple, for example), or another new technology (CDMA vs. TDMA), can change its fundamentals. As Mike Maubousson of Credit Suisse First Boston has pointed out, new companies with earning assets based on information and intellectual capital behave according to power law functions. Simply put, companies that get ahead tend to not only stay ahead, but to get farther ahead. If a competitor becomes cheap because it is losing market share, history tells us not to wait around to see if it can regain it. In the past, comebacks of this type have been rare, and it's unwise to bet money on its happening.

3. Some business models are inherently superior. Generally speaking, the higher the proportion of a company's earning assets is contributed by intellectual capital, and the less capital intensive it is, the higher its quality of earnings is. It's also easier for such companies to make rapid changes required by new developments. While both Microsoft <http://www.microsoft.com/> and Intel <http://www.intel.com/> are great companies, Intel must invest billions of dollars a year in new plant and equipment for semiconductor manufacture. Microsoft, in contrast, has only a fraction of the massive sunk costs of Intel, which is why Bill Gates has been able to admit mistakes in his estimation of their markets, and change Microsoft's direction to keep and expand its lead.

Another inherently superior business model is based on time-to-payback. The reason Intel is so successful in spite of the capital intensive nature of its business is that microprocessors dramatically decrease the time-to-payback of everything from balancing a checkbook to designing a new jet aircraft. It is worth almost anything for an accountant or a corporate financial officer to not have to recalculate every spreadsheet scenario or tax change implication manually on ledger sheets. Another example is PointCast <http://www.pointcast.com/> - its success is two-fold: it reduces the information gathering effort by the user; and its price (it's free) dramatically reduces its time-to-payback, since the payback is to zero cost, time spent learning how to use it is close to zero, and user time spent actually performing its task is zero, since it is completely automated.

4. Products are where the rubber meets the road. You must understand a company's product line, its market dynamics, and the company's self image. We are in a new, high tech world. Increasingly, hot new products undergoing rapid and growing acceptance in immature, rapidly expanding markets cannot be judged by the historical norms of traditional analysis. They either simply don't apply, or must be supplemented. The expanding uses to which a new product can be put are overwhelmingly more important, since these new uses increase the product's importance and value, and produce earnings that are invisible and unpredictable in the present.

5. Don't worry about price and volatility, worry about whether you are in the right sectors. I don't mean pay anything for a company - price is relevant. What I do mean is that in the fastest growing industries, putting in limit orders to save eighths will often ensure you never own the best companies. Putting in stop loss orders will ensure you pull up your flowers and leave the weeds, since most of the best, fastest growing companies are volatile. You should hold your companies unless the fundamentals of their business begin to deteriorate, and ignore temporary price targets. In the companies of the future, these price targets will nearly always prove to have been far too conservative. If your goal is a 50% price appreciation, you will never own the company whose value increases ten times.

6. Use Management only for specifics. The abundance and accessability of brilliant thinking and research on the Internet today makes the need for management input in your decision making all but obsolete. We use management only when we need something specific, like the number of employees or the amount of goodwill amortization last year. We do not use management inputs for qualitative decision making inputs. If there are problems, you will be the last person they will tell, their focus is often narrow, and their world view is different, while yours should be global. Try the products yourself, or talk to people who use them. Do your own work.

7. Guilder's Laws of the Telecosm and Microcosm tilt the playing field toward individuals and away from institutions. With Gutenberg's invention of the printing press during the early years of the Enlightenment, the absolute power of the Catholic Church over individuals was broken forever. More of the information in the world was accessible to individuals than ever before. While the playing field still wasn't level, it was certainly better, in that it gave more power to the individual. With the information revolution, and the rapid pace of change it has created, individuals now have available to them as much information (power!) as institutions, and the ability to make use of it rapidly, without the difficulties large organizations have in adapting to rapid change, let alone dictating the direction.

8. Bide your time when buying. You can afford to ignore IPOs. In the first place, you will almost never have access to the good ones. They are sold out far in advance to institutional investors and a few very wealthy individuals. But normal, annual volatility will almost always give you an excellent buying opportunity if you are patient. The historical, annual high & low prices in the Value Line Investment Survey <http://www.valueline.com/> show that, over the last decade or more, nearly every company you own has dropped in price 40% or more during the course of a calendar year. This reflects normal annual volatility for all except the safest, highest dividend companies in mature industries, and even those have typically dropped 25% or more in price during the course of a year.

9. Don't focus on just one company you absolutely have to own. Have a stable full, and buy whatever drops into your lap. I've can't count the number of companies I've missed buying that have turned into great companies. I still don't own many of them. If I had kept cash until I could buy them for what I thought they were worth, we would be in sorry shape today. As far as I can tell, not owning them hasn't hurt our performance, and I've bought some companies that turned out to have done better than the ones I missed, and that I probably would not have purchased otherwise.

10. Gates' Law. In the short term, potential returns tend to be overestimated. In the long term, people underestimate the potential of new technologies. This has been pointed out by Bill Gates, and is responsible for many investors becoming disappointed over time frames that used to matter more, like one to three years. If you are convinced of the value and direction of a new technology, expect results to take longer than they used to, and the potential value over the next three to five years to overwhelm your predictions.

11. Learn to recognize extremes of market sentiment. I don't care what the academics and Nobel laureates say, public records of the Federal Reserve, as well as economic history, show that at the most important times, such as major turning points in the economy, and especially during periods of revolutionary technological change in civilizations, the financial markets are not efficient, the experts are overwhelmingly wrong, and the masses are almost always right. There is a large, really good shopping center in my end of town with a superior mix of businesses. It's my favorite economic indicator. I judge the economy's health by how easy it is to get a parking space there in the evenings or on weekends. In 1994, I could go any time and get a parking space right up front. Over the space of a few weeks near the end of 1994, I suddenly couldn't find a parking space at all, never mind up front. Look for Clues. This is often why average citizens are ahead of the Fed or government economists. They are living the recoveries, recessions and bear markets, and such clues are immediately obvious. Although not everyone is consciously aware of them, they still act on them. High level bureaucrats who are on the tax dole are often too insulated from these effects, and blind to the near term signals.

12. Understand the source of a company's value. Value creation is increasingly external. GAAP accounting practices, and the essential corrections to distortions of GAAP that are performed by Economic Value Added (EVATM) analysis <bookstore.html>, are only useful when assets can be measured using the limited tools of the old industrial economy, which haven't changed since the 1930s. Increasingly we must be able to understand other, intangible sources of value. We have not yet devised measurement systems for them, but you must understand them at least qualitatively. For example, it is increasingly essential to understand a company not just in terms of its products, customers and suppliers, but also in terms of its ecosystem. It is analogous to trying to understand the value of a spider in a forest ecosystem. It is impossible if we only look at the spider in isolation. We must also look at the effect the spider's existence has on the ecosystem as a whole, what specific relationships the spider has developed with other life forms, and how they affect different parts of the ecosystem.

Goodnight,
John Del Vecchio
Investment Research Fool
The Motley Fool
http://www.fool.com
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With regard to how one might view the highs versus the lows, I have included what I think is an excellent investment strategy used by IPS funds.

I'm just lurking on the GG board for now, but this TMFFuz post succinctly pulls together so many lines of thought snaking across the Fool boards it ought to have a dedicated button so people can read it without having to hunt for it when it inevitably gets buried by subsaquent activity here.

But failing that, I'll just print it out.

Regards,

Pup
(definitely not a gorilla)
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I judge the economy's health by how easy it is to get a parking space there in
the evenings or on weekends. In 1994, I could go any time and get a parking space
right up front. Over the space of a few weeks near the end of 1994, I suddenly couldn't
find a parking space at all, never mind up front. Look for Clues.


Here's a clue: a fat man in a red suit and a white beard who appears in malls at the end of every year, and who seems to be associated with bursts of crass consumerism. This otherwise insightful analysis falls down a bit here.
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No. of Recommendations: 5
DP: One big difference between GG and RB is in the area of hypergrowth.

The risk averse GG screens for the existance of hypergrowth as an investment condition.

RB looks for the potential of a Huge Growth Curve as an investment condition. This condition may be closer to what some investors use for GG Candidates.

Both have proven to be good investment approaches, but there are some differences. I believe we can all benefit from cross-screening potential investments using different approaches, e.g., GG, RB, MI, etc. Each approach has some subtle and some not so subtle differences they are looking for. Knowing these differences, we can learn more about our potential investment thru cross-screening.

However, please don't confuse cross-screening with melding of requirements. As with any compromise solution, we tend to settle on the lowest common denominator appraoch, leaving us with the worst of all possibilities.

Hope this helps with the screening processes.


FOAP
Harold
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The risk averse GG screens for the existence of hypergrowth as an investment condition.

Only in the case of enabling software and hardware technologies. In the case of applications software, the book suggests buying a basket of stocks when the product is in the bowling alley, which is prior to the beginning of the tornado.

--Mike Buckley
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RB looks for the potential of a Huge Growth Curve as an investment condition. This condition may be closer to
what some investors use for GG Candidates.


Harold -

You are correct. Although for enabling technology Moore recommends buying during the tornado watch.

My list is just one way to screen for high growth companies. Certainly not a claim they are in tornado markets or involved in gorilla games. And as others have pointed out, the requirements may be too low in this screen...perhaps Sales TTM 1 yr growth should be set to >=90%.

I'm a big fan of MI. MI got me into Qualcomm long before I understood CDMA. I regularly check the workshop and overlap screens for potential investments.

Fool on
DP
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I would like to go to the right point.

What companies are showing momentum to become a Gorilla?
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Thanks Mike for this correction.

Harold
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You wrote:

<Unfortunately I cannot screen for Gross Margin, but
it is easy to reduce the pack via this method.
>

I've found that the best screening software on the Internet, and in my opinion the best anywhere, is Microsoft's Money Central Investment Finder. It requires you to download and install software. I normally avoid any Web site that requires local installs--but this tool is worth it.

Investment Finder will allow you to screen for a huge set of variables, including gross margin. The best part is that it allows you to create your own calculations as screening criteria. For example, I like to look for stocks that are increasing price on greater than average volume. (William J. O'Neil's philosophy). To approximate this volume increase I screen for [avg month volume]/[avg quarter volume] > 1.4. (Recent volume is 40% higher than a three month average).

Investment Finder offers a ton of useful criteria such as exceeded estimates for the last two periods, increase in institutional ownership, analysts raised estimates. You can screen for revenue, EPS, volume and stock price growth in a number of time periods. When the results come back you can sort on any column and save the results only or results plus criteria to Excel.

ps. I don't work for Microsoft and as I said I'm not a fan of downloading and installing components--but this tool is great for screening.

You can find it at moneycentral.msn.com/investor/finder/welcome.asp

Paul
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Thank you Paul,
great help- I feel the same way-this screen stands out
bulldog
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