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No. of Recommendations: 236
What's most alarming about the Donlan's piece in Barron's this week is not what it means for Cisco's future, the implications for Cisco's shareholders or any broader implications regarding the technology market…since in this investor's view, the article adds nothing constructive to any of these things. What's really alarming is how a very poor piece of journalism gets such a prominent cover story position in what many consider one of the elite financial publications. This piece says much more about what Barron's is doing to try to get reader's attention and as such has substantially reduced the creditability of Barron's for this investor; and when the dust settles, I suspect for millions of other serious institutional and individual investors around the world.

My problem with the piece is very simple. No insight regarding the company's operations or ways of doing business to support the conclusions, the use of eye catching detailed historical facts to attempt to color a weak overall analysis of the company's prospects, superficial P/E calculations where he jumps to conclusions to support his overall hypothesis but where such conclusions are not supported by any facts, analysis or meaningful research. As a long-term investor, I am always looking for good research and analysis, either in support of or counter to my investment philosophies and assumptions. I believe that to be a successful investor, one needs to constantly reexamine the reasons why you own a stock, how the market characteristics are changing and how a company is evolving. Although Donlan considers Cisco Systems to be a “house of cards,” my view is that Donlan's journalistic ability is the real house of cards. It's a shame that hours and hours of analysis and discussion will result out of such a shabby piece. Now for some of my specific criticisms.

House of Cards. Donlan quickly jumps to his conclusion that Cisco is a “modern house of cards” based on its acquisitive ways. A stronger analyst might take a couple of moments to consider the market in which Cisco competes. Most networking and telecommunication investors know that this world has been evolving very very fast over the past decade. Cisco recognized early on that the convergence of the networking and telecommunications world was a natural evolution brought about by the movement to IP technologies, the need for efficient utilization of bandwidth, and above all, the growth of the internet. With the drastic changes resulting from these multiple forces, corporations, telecom carriers and the communication needs of the home market are changing very fast. Cisco has taken its roots in networking, added its extensive investment in R&D, and has perfected the art of M&A to acquire new technologies and first class engineers to allow it to stay at the forefront of what their customers demand from communication equipment vendors as this environment evolves.

“Cisco stock has all the trading power that a boy in the 1950's would have had if he could print his own Mickey Mantle rookie cards. Beyond routers, switches, software and services, that's what Cisco does for a living: It prints its own trading cards.” You know at first I thought this was at least a cute literary comparison, but on second thought, the insinuation of this statement is so ludicrous that its not even that. Unlike a “boy in the 1950's…” printing Mickey Mantle rookie cards, Cisco's stock represents ownership in the discounted future projected cash flows of the company. If the company issues additional shares to acquire a company (and the incremental discounted future projected cash flows associated with that acquired company), then the real question is whether these acquisitions can indeed generate these anticipated incremental cash flows…or even do better….after being folded into the Cisco world. Mr. Donlan, your article tells investors nothing to indicate that Cisco has NOT been able to realize these incremental cash flows from acquisitions. In fact, Cisco's financial performance over the 40 quarters that they have been a public company, under some of the most intense investor scrutiny possible, leads most investors to conclude exactly the opposite.

“One target company that had $10 million in revenues at the time of acquisition provided Cisco with technology that now generates more than $1 billion of revenues. But not all acquisitions are so successful, and for most of them, it's hard for an outsider to gauge success.” What information can Donlan provide to inform us about the less than successful Cisco acquisitions? It sure would have been interesting if he could have discussed one or more acquisitions that were NOT successful. Perhaps he might have taken the trouble to talk to one or more of Cisco's customers to see if Cisco has not been able to deliver technology and products that they require in the rapidly changing marketplace, that their technology is obsolete overpriced or not always delivered on time. In short, where's the beef here, Mr. Donlan?

Cerent. “Even with Cisco's market cap of 39 times revenues, Cerent ought to have $176 million of revenues to join the Cisco family on a basis that's equitable to Cisco's existing shareholder's.” Now Mr. Donlan, exactly how much revenue can we attribute to the Cerent acquisition for the current year or can we anticipate for FY 2001? It could be $20 million of revenue in each of the next 5 years and then Mr. Donlan would have a very good point. Or it could be $150 million in the current year and $275 million in FY 2001 and then Mr. Donlan's conclusions would be completely off base. My hypothesis is that when you combine cutting edge optical technology with the global reach of Cisco's sales force and growing customer base plus bundle with other technologies, that this type of package might be exactly what Cisco's customers are looking for and in fact demanding of their equipment vendors. In my view, Mr. Donlan's analysis is as superficial and as incomplete (and therefore as wrong) as concluding that Federal Reserve Chairman Alan Greenspan has Alzheimer's disease based on an observation that the average person on the street is unable to understand Greenspan's discussions about the wealth effect, supply side economics, or the process governing the Fed's decision to hike the discount rate by 50 bp instead of 25 bp.

Financing packages. “In order to close their deals, they are giving generous financing packages to their customers – sometimes to customers whose ability to pay ought to be more closely explored.” Perhaps its apparent by now that Mr. Donlan is throwing everything he can to see if anything can stick. “In order to close their deals…”, Mr. Donlan, where's any evidence at all that Cisco's sales growth would not be what its is without financing support? Are we talking about 90% of their sales or 2% that are dependent upon financing support? If its 90%, then maybe there is something here that investors need to understand better; if its 2% and growing slowly, then your wasting our time on this issue. “Generous…”? Well, if you make this type of statement, you must have done some analysis, right? Have you talked to the borrowers of this financing? Have you talked with other vendors that lost business due to Cisco's “generous” financing terms? Have you consulted with some commercials banks that have told you that Cisco's financing practices are leading to big trouble in the future? Boy, this is getting monotonous Mr. Donlan, but my question to you continues to be: where's the beef?

The competition. At least Mr. Donlan was able to name a couple of Cisco's key competitors, Nortel and Lucent! So he must have done at least alittle homework for this piece….But, there you go again Mr. Donlan, trying your scare tactics in lieu of anything resembling in-depth analysis. “If Cisco sold at multiples of its competitors, investors would be shocked. If the market valued $1 of Cisco's earnings the way it values $1 of Nortel's earnings, at a multiple of 100, Cisco stock would be selling for $35 a share. If it could command Lucent's multiple of 46, Cisco's share price would be around $16.” Other than giving Mr. Donlan credit for having a calculator that seems to be able to crunch some numbers, this type of analysis, without even attempting to go another step deeper, is amazing for a cover article published in a publication of the reputation of Barron's. Perhaps Mr. Donlan could have gone through the trouble to investigate the differences in the product lineup and major sources of revenues of these companies. Which companies, Mr. Donlan, are struggling to transition from revenue dependence from legacy telecommunication equipment such as circuit switches? Which of these companies have integrated multiple acquisitions better than the others (examples: Nortel purchase of Bay Networks and Lucent's purchase of Ascend Communications)? How about a simple one, Mr. Donlan….which company has been able to demonstrate the highest and most consistent top and bottom line growth over the last 40 quarters? Doesn't this information relate to how investors value these companies?

Hopefully the best thing that will come out of Mr. Donlan's Barron's article will be a heightened investor awareness of the fallacy of blindly depending upon cover articles in the major financial press to guide investment decisions. In my view, the capability of investors, both institutional and individual, to differentiate between innovative research, insight and analysis versus superficial analysis and lazy journalism cloaked in the respectability of a major financial publication, is significantly underestimated. The real question is when the financial press will stop underestimating the intelligence and wisdom of investors?

Whether you are a believer in Cisco Systems as a good long term investment and have a growing long position or suspect that they are severely overvalued and have a major short position outstanding, I believe that investors are starting to demand higher quality and more informative financial journalism to help guide investment decisions…and not allow financial publications pass superficial research and poor financial journalism off as anything other than what it really is:

Financial Journalism, National Enquirer-style.
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gmatsumoto-- thanks for the (long :)) detailed and thoughtful analysis of the Barron's piece.

My reaction to the "if CSCO had the same PE as NT and LU it would be worth..." was

Yeah, if only pigs could fly!

But your answer was better, more refined and informative.

Thanks for taking so much trouble and for sharing your thoughts with us





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No. of Recommendations: 4
gmatsumoto,

Thank you for the excellent anlaysis of an analytical failure. Your points are all valid, beautifully researched, cross checked, well written. Exactly what any publisher would be looking for, right? Wrong. What you have presented will sell not one column inch of advertising. What Mr. Donlan wrote will have advertisers (especially any CSCO competitors) slavering to place ads in the publication, especially if placed in conjunction with any future efforts by Mr. Donlan (that's called 'preferential placing' usually gets a 20-30% premium!). I know this, I worked for a publisher for fifteen years.

I don't know Mr. Donlan's credentials, I do know that Barrons, like Business Week, like Wall Street Journal, like TheStreet.com, like. . . ad inf., are in the business of making money, like all companies. The WSJ that lands on my doorstep each AM probably weighs in at three pounds, 1.5 pounds of advertising, .5 pounds of white space and 1.0 pounds of actual journalistic output. (Will Rogers said, "all I know is what I read in the newspaper". Do you suppose he was being literal?)

I have crossed swords with many journalists in the past, I felt they were doing a disservice to their readers. I have been roasted in public print, gotten snotty (while literate) emails (they emphasise literacy in journalism school) and, in general, very little satisfaction. They have control of the medium. They won't print what you say, or only edited parts of it, edited to make you look like a fool (small "f").

The lesson to be learned is, know that you are right, know that your research beats theirs, invest with your heart and mind, make a lot of money, buy the publishing house and fire their sorry a---s, don't get mad, get even.

Keep up the good work.

Joe
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No. of Recommendations: 16
Hey Joe,

I understand that this type of article is designed to sell newspapers. But my idealistic mind tells me that its forums like Motely Fool that have the best chance of going at this type of shoddy journalism and get some decent facts out there into the public domain. Perhaps its a futile attempt, but I had nothing else to do for a couple hours this hot and muggy Saturday....

Seriously, with the internet era, I suspect that there is going to be a hell of alot of new pressure on publications such as Barron's to find the best journalists, do the best research and write the best articles. There are too many other mediums for people to go too to get their information.

In my mind, if I reached one investor that might otherwise made a stupid investment decision based on the Donlan Barron's article and made that person do alittle deeper thinking about what new information they were being provided, then it was worth my time.

Good luck.
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gmatsumoto,

Your goal of keeping others from being lead down the wrong path by shoddy journalism is a noble one and I think your post did much for those who will read it and take it to heart, I commend you for doing it. I also feel strongly that the print press will not easily change themselves. Their readers will have the most influence in that regard. Your kind of post is a start, inform the reader that they should have better expectations of their news sources, and I don't mean CNBC and TheStreet.com and others of their ilk who are nothing more than the same old thing rehashed, packaged differently, motivated the same and foisted on us via the web.

In my idealistic view of the future we will need writers who do good research, conduct worthwhile interviews and have cogent opinions. They will also be motivated by the same standards of journalism that were the foundation of the Pulitzer Prize and all the ideals it espoused.

Now, all we have to do is convince the best of the brightest writers to revisit the ideals they had in journalism school and convince the publishers who truly wish to continue to inform and shape public opinion that there is a viable market for this that is not driven by advertisers but by an avid, intelligent public who demands good information.

Guess I'm asking too much, huh?

Joe
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No. of Recommendations: 1
gmatsumoto,

Kill the messenger---


From Forbes, 05/15/2000 "It's a Mad, Mad, Mad, Mad, Market", by Scott Woolley

Excerpt:

>For sensible investors, the upside of widespread investor irrationality is the opportunities it presents to capitalize on other people's missteps. The bad news: The chances of your acting rationally are very slim.
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No. of Recommendations: 2
you miss my point entirely.

I'm very open to interesting insights about Cisco Systems or any of my other investements, positive or negative. The problem with this piece in Barron's this week is that by cloaking himself in the respectibility of a well known financial publication, it gives Mr. Donlan's analysis much more public exposure than most other mediums. This by itself wouldn't be bad, but it sure would have been more interesting and valuable for the readers if this guy had done more than a superficial job of analysis.

It about time that publications like Barron's and "journalists" like Mr. Donlan start to respect the intelligence of their customers and provide product to serve their needs. Perhaps they could learn quite alot in fact from the laser beam customer focus of a first class company like Cisco Systems.

If Cisco is overvalued then let's see the beef. Let's discuss the technology, the lack of innovation, the dissatisfied customers, the misreading of the market.

The most interesting comments from this piece for me were the following:

1. "The San Jose-based company enjoys revenue growth of more than 50% every year."

2. "It is a great engineering company, brillantly managed and technologically astute."

3. "In the past three years, Cisco spent $3.3 billion on research and development internally...."

4. "One target company had $10 million in revenues at the time of acquisition provided Cisco with technology that now generates more than $1 billion of revenues."

But....these comments and facts don't add a heck of alot to what your average person already knows about the company.
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To: GMatsumoto

Thanks for the excellent critique of the Barron's article on CSCO. When I read the article the first thing I noticed were the many assertions the author mad without citing examples..for example, the assertion of "takeovers that have not worked out so well." Which ones? I haven't heard of any.

Barron's has been having editorial schizophrenia for a couple of years. In 1997 or so when the Internet and Internet stocks first bloomed, most of their front page articles were from Internet bears comparing the Internet to the hula hoop and predicting the demise of Internet stocks. When they finally caught on to the Internet/tech revolution they didn't have the editorial strength to assess articles like this one on Cisco. Thus, weak critiques like this which more or less conform to the Barron's bearish editorial philosophy end up in the magazine because they have no one with any tech stock knowledge capable of asking the questions that should have been asked before they published this article.. on the front page, yet. The article probably made Alan Abelson happy and that's all it needed to get such prominent posting.

Cisco is now making quite a lot of money off something that barely existed 5 years ago.. the Internet. Investors paying the high stock price and high p/e might not have forseen the Internet, but they had confidence in a company in the right business which can handle technological change. Who's to say what other technological changes will come and present opportunities for the company to increase its size and earnings? The company deserves its rich premium because of its past success.
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Well written post gmatsumoto, although I see you didn't want to tackle the last - and most meaningful - few paragraphs. P/E ratios do matter. In the end that's all you're buying. As the long term investor you say you are, how can you justify paying 190 times for earnings that even the company itself admits will grow at less than 30% annually?

When will they earn that 2.5 trillion?
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It would be interesting to send in a shortened version of this letter to Barron's and see if they print it. It's certainly much better written than much of the drivel that appears in that magazine.
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It's interesting that Barrons has a history of trashing sucessful companies. Look at the response from the CEO of Exodus Communications to one of there articles last fall.

http://boards.fool.com/Message.asp?id=1100306000261000&sort=id

Exodus (EXDS) has done quite well since then; Thanks Barrons.
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No. of Recommendations: 2
Those of us who like the Rule Maker idea at TMF stop worrying about "houses of cards". The fatc remains that at present Cisco generates tons of folding stuff each quarter and pays out less of that folding stuff to its suppliers and employees. Ignore all the accounting stuff look at the cash flow. Anyway its accounts are pretty good with minimal shenanigans WRT stock options and the like (documented in various places on TMF.

Cisco is just using whatever weapons it has available to grow - if its harder for it to do all share purchases then presumably it will do it som eother way (and also probably the prices asked by many startups will shrivel dramatically).

However in the interests of due dillignece (and pointing out something that Barrons seemed to miss), Cisco's revenues for many of its newer product areas such as telephony and optical are not yet significant. Should Cisco have a "bad quarter" soon where for some reason revenues in its core LAN routing and switching areas don't grow at quite the rate expected then be worried because all the other bits are not yet able to stand on their own.

DD
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While Barrons (and most of the written and TV press) were tearing down CISCO yesterday (5/8/00) - CISCO was about business as usual. These are some headlines from their newsreleases found on their webpage:

http://www.cisco.com/warp/public/146/

May 8 Cisco Announces First Comprehensive Digital Set-Top nfrastructure Solution Supporting all Major Standards

May 8 Cisco Introduces Cable Headend and Cable Modem for OpenCable/DVB/DAVIC-based Cable Operators

May 8 Cisco Accelerates Success of E-Business with Integrated IP Telephony Solution

May 8 Cisco Aironet 340 Series Wireless LAN Solution, Among First to Be Awarded Wi-Fi Interoperability Certification

May 8 NorthPoint Communications and Cisco Form Broadband Alliance

May 8 Cisco Systems Announces Availability of CiscoWorks2000 Service Management Solution

<cut>

May 8 Cisco AS5300/Voice Gateway Earns Product of the Year Award from Network Magazine

Bottom line - it's business as usual at CISCO - and they are ignoring this thoughtless journalism.

Ann Molison
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Please pardon my naivete', but if a financial publication knows that by publishing a destructive (perhaps deceptive) article about a truly dynamic company and drive stock cost down 5-7%, would this not provide the powers at that publication (as well as everyone else) an excellent buying opportunity? Shame on me. How could I think such a thing?
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You are not being naive. Sit back and watch CSCO recover. These guys put out glowing estimates drive up price and sell at about 80% of peak gain. They know full well the influence they have and use it to THEIR advantage. Little guys like you and me just have to ride it out.

CSCO Long-term holder (5-10 years).
Bronne
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gmatsumoto,

i want to shout out a big THANK YOU for writing such a concise and informative post regarding Barron's shabby journalism. as you voiced all of my concerns about the article in your post, i found myself saying "yeah! tell 'em! exactly!" as i read along (well not exactly, but i was pretty excited).

unfortunately, your post won't get the visibility that the front page of Barron's gets, but it's a small step towards rectifying that hatchet job that they concocted last weekend.

anyway, thanks.

jp
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Who were the investors (and I use the term loosely) that sold off on the 'news' in the barrons article? I would like to think that institutions have more sense than to act on information in a commercial publication. Certainly they have their own indepth research to debunk the barrons. CSCO is held by nearly 3000 institutions. This leaves individual investors selling enough on this 'news' to drive the stock down nearly 4 points. I believe the increased market volitility and 'irrational' valuations are driven by the number of new investors recently entering (last 1-2 yrs) the arena. Dont get me wrong, in the long run the larger the customer pool for securities, the more liquidity, which could serve to make stocks a kind of 'currency' and certainly a viable savings tool. However, knee jerk reactions by individuals who have only a superficial knowledge of how a business works or how to value a business only serve to support the view of the Wise that investing is too complex for the common citizen to undertake on his/her own.

MMM
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Thank you for your very articulate response to the Baron's article. Whether or not one believes in Cisco's long-term prospects, it is too bad that such superficial analysis can have such an influence on share price, at least in the short term. However, its effect should have no long-range result on a company with a strong management, outstanding execution, and an excellent balance sheet.
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Boy, did this create a great buying opportunity before they announce first quater earnings today after the bell. BUY, BUY, BUY!
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to gmatsumoto:

Great analysis of a sensationalist, damaging article. Sadly, I fear that the financial press,in becoming more mainstream, is resorting to more of the tactics of the mainstream press. Do you think Donlan has read your response? Perhaps you can post it directly to Barrons.
Good work.

mitchelg
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No. of Recommendations: 1
Re Baron's Dolan and the Cisco kid. Anyone who relies on the press for information other than as an alert that some event did transpire or is about to is obviously not a "fool". You get the Dolan's of the press core, most of whom are someone's son-in-law, attempting to make a splash for the big P-prize, posting enflaming headlines for the thought-impaired to grasp and wave as a banner of psuedo knowledge. Who reads Baron's anymore. If it was such a good source of wisdom they wouldn't be giving away free subscriptions. Hold the Cisco, easy on the mayo, run it through the garden and forget the food critics ramblings. We are big boys and girls, look at this company. Gosh Dolan, please, look at this company.
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No. of Recommendations: 1
gmatsumoto,

Your last line said it all:

Financial Journalism, National Enquirer-style.

I worked for The Wall Street Journal in the '60s and Barron's was the sorry sister then, and it still is now: Opinionated, ill-researched copy that titillates, offset by voluminous, detailed statistical data that can't be found elsewhere, at least not on the weekend.

People buy the rag for the second, and many unfortunately believe the first.

BigMarv
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No. of Recommendations: 0
ouch....but well said. Hélène
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No. of Recommendations: 1
I wish I had $1000 to invest in every company Barron's trashes. I'm sure I could improve even on the 57% return in investing in Rulemakers!
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Funny how Foolish minds think alike. The National Enquirer was the first thing to come to my mind when I first received this week's Barron's in my mail box.
It's not the first time I've seen an irritatingly irresponsible yellow journalistic cover on Barron's. I do believe I'll be cancelling my subscription today. I don't read the National Enquirer either.
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No. of Recommendations: 5
kinker: That's the problem; he did look at Cisco...and found it to be a good company that is cuurently way, WAY overvalued. I have yet to read of anyone who's been around Wall Street for more than five years (who's !Gulp! over thirty) who doesn't find it overvalued. You wide-eyed Cisco groupies are in for a real learning experience. Look at the reference to the Walmartization (sic) of the stock. I was around for that. You bought too high and sat around for five years waiting for the stock to move. Could have said the IBMization of Cisco...took nine years to break back to upside from high in '87.

Ain't no horse/Can't be rode.
Ain't no cowboy/can't be throwed.
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Thanks Gmatsumoto

I was fortunate enough to buy CSCO 5/1/97 at a split-adjusted 5.775 (over 52 at the time pre-split) when people like Donlan were saying it was overpriced.

Barron's, of course, is well known for bearish cover articles and I normally don't pay too much attention to them. I thought it was interesting that a pretty favorable article on CSCO appeared just a week or two earlier in Fortune, but it was the Barron's article that moved the stock. In this kind of market, bad news - even in the form of a Barron's article - can really hurt a stock. Nobody's paying attention to the good news.

The one thing you said which I disagree with is your opinion that the capability of investors to see through this financial journalism, National Enquirer style, is being underestimated. It seems an awful lot of people read the article over the weekend and acted on it Monday morning. The NY Times article I refer to below may have had something to do with it.

In what I thought was quite a coincidence, the Business section of the Sunday NY Times (May 7) carried an article on CSCO by Mark Hulbert, the newsletter evaluator, in which he expresses doubt that CSCO can sustain it's huge growth rate. For some reason, I couldn't get the link to this article to work, so I show it below in its entirety. Any reactions?

Expectations, Over the Rainbow

by Mark Hulbert

NY Times May 7, 2000

It is fair to say that technology investors have high expectations about the future growth of companies in their portfolios. But I bet that those companies have almost no chance of meeting those optimistic expectations.

Why am I so downbeat? It all comes down to the issue of whether huge growth rates can be sustained.

Consider a star of the new economy, Cisco Systems. Sure, its gear is essential to the growth of the Internet. But it is unlikely that Cisco will perform well enough over the next five years to satisfy the earnings expectations that I believe are implied by its current price-to-earnings multiple of 188.

To gauge those expectations, we first need to calculate how much Cisco's earnings are likely to grow over the next five years.

If Cisco follows the typical pattern of growth companies, its multiple will drop as it grows and matures. So assume that five years from now, Cisco's P/E will be 50 -- still well above the market's long-term historical average of about 15.

Next we need to postulate the company's stock performance. Cisco's stock has climbed 105 percent, annualized, over the last five years. So, to be conservative, we will guess that it will grow just 22 percent a year still double the stock market's long-term average.

Given these cautious assumptions, Cisco's stock will be at $183 in May 2005, up from $67.5625 on Friday. And many investors would be happy to get that kind of return.

But here is the rub: Cisco's earnings will have to grow by nearly 60 percent a year, on average, over the next five years to meet those expectations. And if we assume that Cisco's P/E is below 50 in 2005, or that its price is higher than $183, the requisite earnings growth rate will have to be even higher. To put this in perspective, consider that the earnings growth rate of the median technology company has been just 13 percent, annualized, over the last five decades.

So if you buy Cisco today, expecting that it will hit $183 in five years, you are making an implicit bet that its earnings will grow five times faster than those of the average technology company. And new research suggests that the odds of that are very low.

Josef Lakonishok and Louis K.D. Chan, finance professors at the University of Illinois at Urbana-Champaign, studied nearly every technology stock from 1951 to 1999. In particular, they sought companies whose earnings growth rates were consistently above the median of all publicly traded companies.

They found that over periods of five years or more, just 4.7 percent of companies, on average, had earnings growth that beat the median during all years of the period. The number is statistically insignificant because, assuming that earnings growth was random, 3.3 percent of the companies would have beaten the median each year in any case.

Then the professors loosened up a bit, and searched for technology companies whose earnings growth rates exceeded the median in four out of five years. The results were almost identical. Their conclusion: Sustaining consistent, above-average earnings growth over five years is so rare as to approach statistical insignificance.

Of course, the professors were looking only for those technology companies that would beat the median earnings growth rate. The analysis of Cisco suggests that investors are betting, in effect, that the company
will beat the median earnings growth rate by a factor of five.

I do not mean to pick on Cisco. It is unlikely that any company's earnings can grow 60 percent a year for the next five years.

But analysts are forecasting such growth for many companies. According to First Call/Thomson Financial, nearly 280 of the nearly 6,200 companies it tracks have consensus five-year projected earnings growth rates of 60 percent or more, annualized.

Some people say earnings don't matter in the new economy. But the professors foresaw that argument: They reached nearly identical results when they looked at sales growth rather than earnings growth.





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Is it possible that Barron's had what they call a "brain fart" and simply allowed such an article without considering their own past positive analysis of CSCO, and many other companies that are growing by acquisition?

I have read many articles in Barrons where the touted Cisco as a great company. Well nothing has changed, its doing now what it has done for years and is still turning in supercharged earnings and revenue growth.

Could there be some other more selfish motive on the part of the author of that article? I'm also curious why such an article would come out just prior to the company's earnings announcement.

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Author: jackslade Date: 5/9/00 3:41 PM Number: 17243
I have read many articles in Barrons where the touted Cisco as a great company. Well nothing has changed, its doing now what it has done for years and is still turning in supercharged earnings and revenue growth.

Could there be some other more selfish motive on the part of the author of that article? I'm also curious why such an article would come out just prior to the company's earnings announcement.


____________________________________

I wholeheartedly agree with what you say. However, past analysis does not guarantee future ANAL-ysis:-)
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Wish I could recommend this more than once...
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Buy Barrons and sell CSCO!
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Bravo Gmatsmoto:
Back in August of 1999, I happen on an Article on TMF, I will not mention his name. It was obvious this guy was predudice. I wrote a detailed break down of
all the misleading statments and plain old wrong facts
to the Editor. I have not bought a "Money" magazine
since. The point being unfortunatly this is not unusual
Magazines,Newpappers, AND most Broadcast media are
Whores
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Wonder what Donlan has to say to this, from this afternoon's Interactive Wall Street Journal:

SAN JOSE, Calif. -- Cisco Systems Inc. posted a quarterly profit that edged past Wall Street estimates amid a strong gain in revenue.

The networking-equipment giant said fiscal third-quarter net income rose 4.1% to $662 million, or nine cents a diluted share, from $636 million, or nine cents a share, a year earlier. Cisco's quarter ended April 29.

On a pro-forma basis -- which excludes the effects of acquisition charges, payroll tax on stock-option exercises, and gains realized on certain minority investments -- profit rose to $1.03 billion, or 14 cents a share, from $649 million, or nine cents a share, a year earlier on the same basis.

Revenue rose 55% to $4.92 billion from $3.17 billion a year earlier.

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Thanks for your compliments and feedback. Regarding the dip in price on ugly Monday...if I'm not mistaken, the stock traded down to the level that it stood at around Wednesday of last week - ouch! But the real question is where it will trade tomorrow (after investors digest their Q3 earnings report released today after the bell), and more importantly where it trades in 3 to 5 years.

The NYT article is interesting and...this is my main point of my widely read post of last Saturday...at least it adds something of depth and analysis to the discussion of Cisco's valuation and P/E. In that respect, the NYT article is light years ahead of Barron's.

Now for valuation....I agree, its a tough question to answer and as a long term shareholder that has seen nothing to shake my belief in the strategy and execution of Cisco's management, a relatively minor part of my evaluation of the company and its ability to return a decent return on my investment over the next 3 to 5 years.

I can only say with alot of confidence that John Chambers and the management team that he has assembled has shown that they can navigate through a rapidly changing technology space and not only grow their revenues and earnings at a very high rate but actually ACCELERATE top and bottom line growth (e.g. 55% revenue growth QoQ in today's release! outstanding.)

When router sales started to slow and other technologies came into play, they bought a router company; when covergence of data and voice became inevitable, they made more acquistions. When optical networking started to grow in demand by their service provider customers, they bought Cerent, Monterrey Networks and Pirelli's optical division. My guess is that this company with do its best to stay nimble and on top of the next space that shows huge customer demand, then they will acquire and focus R&D on new technologies to establish market share.

Who's to say that Cisco doesn't (some day) separate out their pure networking divisions - LAN routers and switches - (growing only at a 30-35% p.a. clip) and do an IPO of a portion of those businesses and use the proceeds to buy back some stock? Remove these slower growth businesses from their P/L and balance sheet and make their service provider businesses (growing at 100% p.a.)their core business. Chambers and his management know that the name of the game is not growth for the sake of growth only; instead its about increasing shareholder value by focusing on those businesses where the company is able to achieve maximum value over its risk adjusted required return on capital. Right now, it looks to me like the services businesses, the access businesses (DSL etc.), and optical networking are where they are able to aggregate and create the most value for their shareholders.

My belief is that the Chambers et. al. will continue to grow shareholder value (and therefore the share price) by continuing go through the type of evaluation of their businesses that I mentioned in the previous paragraph.

Simple P/E calculations and implied required growth of revenues and net income to "grow into" the P/E are just too simplistic and ignore the fact that corporations are much more complicated animals than a simple HP12C calculation can give credit to. Don't get me wrong, these calculations are a piece of the puzzle but no way can these types of calculations stand alone to determine whether a company is "overvalued."

Good luck and thanks again for the interesting discussion.
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I couldn't have said it better myself. Cisco is an innovative and unigue company. The stock will go up and solid in the future. What Barrons did was lose me as a reader, and showed me what the major players use to make their riches. However, it did not work, it didn't plummet, and will rise soon.
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Just a short comment. I agree 100% with gmatsumoto's message regarding subject Cisco article (Donlan Barron's article). I quit Barron's some time ago just because of these kinds of articles. Shallow, attention getting! Never again for me.
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Mr Donlan reminds me of a movie critic who can not write a movie script so therefore vents his hostility by bashing whatever he reviews.

So it seems to be with Barron's. I remember an article a few years back on Microsoft which had the same poorly developed arguments.

Isn't it obvious that someone doled out an assignment one day before printing to do a hatchet job on Cisco.

Whether Donlan actually put his name to this piece of work without a bit of remorse will never be known to our fools.

Let it be noted that Investor's Business Daily ran a couple of articles related to the net and networking. The first was specifically about Cisco and it was not written by Mr D nor evoke any similiar tone. It ran in the Monday issue. The other article was an interview with someone from IBM who believes that the networking or Net sector is just getting warmed up.

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gmatsumoto:

Simple P/E calculations and implied required growth of revenues and net income to "grow into" the P/E are just too simplistic and ignore the fact that corporations are much more complicated animals than a simple HP12C calculation can give credit to. Don't get me wrong, these calculations are a piece of the puzzle but no way can these types of calculations stand alone to determine whether a company is "overvalued."


I've seen statements similar to this one used on many other boards to justify PEs over 500 (BRCM and NTAP) or even 1000 (YHOO and EBAY). Those stocks have witnessed declines of 50% or more from their highs.

I even used to believe gmatsumoto's statement myself not too long ago.

I know the reply will that "but CSCO is a better company than those, it won't happen to CSCO." But it has happened to MSFT, DELL and many other "great companies."

If you are a strong long, why worry or get upset about Barron's, interest rates, PEs or the "big negative" du jour.

What gmatsumoto or I believe does not set the market price for CSCO.

Just don't think it can't get halved from its high of 82.

Likas
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mjhvalsrch:

Let it be noted that Investor's Business Daily ran a couple of articles related to the net and networking. The first was specifically about Cisco and it was not written by Mr D nor evoke any similiar tone. It ran in the Monday issue. The other article was an interview with someone from IBM who believes that the networking or Net sector is just getting warmed up.


I agree that Investor's Business Daily (IBD) is a much better publication. IBD does point out however that the market, especially Nasdaq, is pretty weak (read The Big Picture in the first section).

IBD also rates CSCO a D (E is the worst rating) for Accumulation/Distribution which reflects a moderate amount of institutional selling over the past 13 weeks.

Likas
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Did you happen by any chance send your post in to Barron's as a rebuttle to their article - with a request for response? It might go under "letters to the editor"...

Considering the opportunistic bias of the Barron's article, I'm thinking that they really ought to hear your viewpoint (and mine, by proxy)...

Jon
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At first glance, the article looks like words and numbers, signifying nothing.


"So if you buy Cisco today, expecting that it will hit $183 in five years, you are making an
implicit bet that its earnings will grow five times faster than those of the average technology
company. And new research suggests that the odds of that are very low. "

Nobody who went through Fool School would expect that (22% return). That is the rate given as the rate of return needed to justify maintaining a credit card balance! I'm hoping for about 12% and would be delighted with 15%.

I would also like to know how he assumes that P/E will fall to 50. P/E has historically varied from industry to industry. (Just listen to my employer, a steel mill, moan.)

"Josef Lakonishok and Louis K.D. Chan, finance professors at the University of Illinois at
Urbana-Champaign, studied nearly every technology stock from 1951 to 1999. In particular,
they sought companies whose earnings growth rates were consistently above the median of all
publicly traded companies.

"They found that over periods of five years or more, just 4.7 percent of companies, on average,
had earnings growth that beat the median during all years of the period. The number is
statistically insignificant because, assuming that earnings growth was random, 3.3 percent of
the companies would have beaten the median each year in any case."

I was under the impression that many well-run companies forsake immediate earnings growth for long-term growth. Commodore Business Machines is a notorious example of what happens to companies that pursue earnings growth at all costs.

At any rate, "random" to a statistician does not necessarily imply a nice, normal bell curve (pun intended). The curve can be skewed many, many ways and still be "random."

"Then the professors loosened up a bit, and searched for technology companies whose earnings
growth rates exceeded the median in four out of five years. The results were almost identical."

Almost identical? Is this a weasel word?

Their conclusion: Sustaining consistent, above-average earnings growth over five years is so
rare as to approach statistical insignificance.

4.7% and 3.3% are not insignificant in themselves.

"But analysts are forecasting such growth for many companies. According to First Call/Thomson
Financial, nearly 280 of the nearly 6,200 companies it tracks have consensus five-year
projected earnings growth rates of 60 percent or more, annualized.

This result jibes nicely with the professors' report mentioned earlier. 280 is 4.5% of 6,200.

Yamaneko
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Likas

The other part of the puzzle that you do not consider are:
Debt CSCO has none.

a
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I just sent your post in with it's number to Barrons, with an invitation for them to reply... this might be interesting.

Jon
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Likas

The other part of the puzzle that earns CSCO premiums that you do not consider are:
Long-Term Debt: CSCO has none.
Current Assets: $7,722 mil
Current Liablities: only $3,776 mil
Order backlog: I do not have numbers handy.
Long history of making or exceding projections.
Dominant player in a very large market
segment.

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Also, a dominant player in a growing market.
Still have lots of cash to aquire other smaller competitors, which they are so good at.

Great management, no debt, great margins, great EPS, and consistant growing earnings beating the street consistantly. This list could go on, and on, and on. Just like their great performance and future prospects.

Oh, about the only negative anyone can come up with is the PE ratio is high. And their point is......?

Longggg CSCO !!!!

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Great points, and I had many of the same thoughts you had when I read the article.
The problem with CSCO really is valuation. Even if they execute perfectly for the next 15 years, with 40-50% revenue growth and 40-50% FCF growth, this stock is fully valued today. I hold it, and would not sell. But it really is a stretch to buy this stock at these prices. Look for a good dip in the stock when its revenue growth rate inevitably drops into the 40's, and then again when it drops into the 30's. It will still be agreat company, but the market will pound it down to reality.
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"The problem with CSCO really is valuation. Even if they execute perfectly for the next 15 years, with 40-50% revenue growth and 40-50% FCF growth, this stock is fully valued today. I hold it, and would not sell. But it really is a stretch to buy this stock at these prices. Look for a good dip in the stock when its revenue growth rate inevitably drops into the 40's, and then again when it drops into the 30's. It will still be agreat company, but the market will pound it down to reality."

Could you not say the same thing about most Nasdaq stocks.
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If I have this right the Barrons article (which I have not read) says that Cisco is dependent on acquistions for growth and that they are only able to make those necessary acquisitions by paying for them with over-valued Cisco stock. The suggestion is that if the stock came down in value then Cisco could no longer use it as a currency for acquisitions. Hence the claim that the whole thing is a house of cards.

The fundamental logical fallacy in this reasoning is the assumption that the value of the "pre-revenue" start-ups that Cisco is buying exists independently of the valuation of Cisco itself.

Cisco is the yard-stick by which all of the others are measured. If Cisco did not have a market cap in excess of $400 Billion then a pre-revenue start-up would never have a value in the billions of dollars. Part of what gives them value is the possibility that Nortel or Cisco or someone else may want to take them over. If the price of Cisco comes down the value of the whole sector, including potential take-over targets, will come down and Cisco can continue on its acquisitive ways.
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Gmatsumoto,

Thank you for your thoughtful and informative posts.

Right now, it looks to me like the services businesses, the access businesses (DSL etc.), and optical networking are where they are able to aggregate and create the most value for their shareholders.

I have a question regarding optical networking. Is this the same area that JDSU(I own them too BTW) excels at with their bandwith enahancing laser technology?

I ask this because JDSU seems to be a viable competitor with a cutting edge technology that could render a lot of CSCO's tech obsolete. So far no one has been able to answer my question regarding whether CSCO's has any answer or acquistion plans to keep itself current in this area.

Thanks,

Michael
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In the optical area, Cisco has chosen to focus on providing optical systems (DWDM, optical switches, Metro optical systems and optical edge aggregation devices) as opposed to components (pump lasers, Bragg grating systems, etc.). I view JDSU as a optical component maker and therefore they are actually a supplier to Cisco and other companies like Cisco in this space (Nortel, CIENA, Lucent, Alcatel, Fujitsu, and others).

Over the last year or so, Cisco has rapidly gone after several acquisitions in their attempt to fill this obviously hole in their product lineup. Cerent was purchase for $6.5 billion, Monterey Networks for $500 million or so, and Pirelli's optical networking business for $2.5 billion or so.

Although they are starting to ramp up this optical business to a $1 billion annual revenue run rate (next quarter), I'm still watching to see if these acquisitions really mesh together well. In my view, Cisco has broken several of CEO John Chamber's "rules" for guiding his acquisitions. With Cerent, he paid a lot of money for a very small company although with alot of promise. However Cerent has focused on optical devices that are centered around SONET optical transmission technology, which I believe is going to gradually disappear from carrier networks over the next several years. With Monterey they acquired an optical switch technology that I believe is still in the R&D and testing phase and therefore several months behind its competitors; therefore Chambers violated his "rule" that Cisco see a short term success out of this acquisition. The success that they like to see might be there somewhere and hidden but I would guess that with the technology still in the lab this is less likely so. With Pirelli's optical division, Chambers violated his acqusition "rules" that the company be a good cultural fit (Italian based company combined with a Silicon Valley Calif. company...) and the "rule" that the acquistion be physically close to their headquarters in San Jose.

So has Cisco compromised their principles to catch up in this space? Only time will tell but its something that this long term investor is watching closely with each passing quarter. Ramping to a $1 billion annual revenue rate in this business line in less than 6 months so far tells me that things seem to be going well so far.

Good luck.
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Thanks for the reply. Educational and made me realize I have a lot more to learn in the optical area.

I view JDSU as a optical component maker and therefore they are actually a supplier to Cisco and other companies like Cisco in this space(Nortel, CIENA, Lucent, Alcatel, Fujitsu, and others).

Didn't the Fortune article specifically name JDSU as a competitor to CSCO who has garnered 17% of the networking market?
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I didn't check back but I'm sure it was Juniper Networks. JNPR is a relatively new company that was the first to develop a terebit router to compete against Cisco's gigibit routers (i.e. faster transmission speeds).

Good luck.
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No. of Recommendations: 5
Hello all.

I am brand spankin' new to the CSCO board. After digging around a little, it would seem that this board (and most do) has its very own Jim Jones: gmatsumoto

His blustery rebuttal to the Barron's article, ironically, is as specious as the offending document. Me doth think the lady protest too much.

You want to see an intersting market pinch emerging, ground zero is Cisco. See, the problem is every swinging dick as a "strong buy" on it because it is the easy call to make. Reputations have been staked. Territorial pissings laid down.

Unfortunately, they have a name for that; groupthink. And those most violently oversubscribed to the imperiled doctrine make the most impassioned critics of the alternate viewpoint. (hint: gmatsumoto)

Cisco is a wonderful company. No question about it. BUT,

To all of you bottoms-up on the kool-aid gmatsumoto has set out for you (220+) ask yourself: Where can a company with a P/E ratio of 185 and a market capitalization of half a *trillion* dollars go? Let's step back and put this in perspective:

"For half a trillion dollars, an investor could theoretically buy either 1) Cisco Systems or 2) the entire gas and electric utility industry in the U.S. In the first case, the investor would be buying a company with trailing 12-month revenues of $15 billion. In the second case, he'd be getting an industry that is paying about $15 billion per year of cash dividends. Oh, and with option No. 2, he'd have about $100 billion left over to go buy something else."

Cisco just doesn't have anywhere to go, except down. All of the analysts, with their reputations on the line can't suddenly flip-flop and advise to sell-off-they would look ridiculous. But I am willing to bet, they are selling their blocks in droves behind closed doors. They know: The emperor is buck naked. What to do?

But eventually, it will reach a critical mass of defections, and then we'll see Cisco back into the 40's and the NASDAQ under 3000. Until we get the Cisco valuation resolved-properly-the NASDAQ will trade under the 4000 ceiling.

The teeming masses seek absolution of the authoritatively stated conclusions of a gmatsumoto to numb the reality of a very ugly truth. At 70 bucks a share, every 10% increase in share value amounts to roughly a market capitalization greater than that of General Motors; as you know, the world's largest corporation.

Long on Cisco? Good for you. Your collective backs support the collapsing bridge under the terminal strain of the heard of silent, freshly converted, so called smart money 'strong buy' types selling out right from under you.

Good luck with it.
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No. of Recommendations: 3
No problem with the contrarian view but, do you kiss your mother with that mouth? Keep up with the contrasting view but leave the language on the street corner where it belongs.

First impressions being what they are, welcome to the penalty box (and on your first post no less).

rdf
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Sorry Fools, my last post should be addressed to USAUTN

rdf
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yo, k-girl:

relax.

the only obscene thing on this board is Cisco's price and the board's starf**ker adoration of it.(oops, sorry)

and with respects to the "contrarian" view you accuse me of having, god help us all when someone who calls a 500 billion dollar stock trading at a P/E of 180+, on 15 billion in revenues, tragically overvalued is fighting against the grain.

as i said, cisco is a great company. but when a post get 220+ rec's that says *nothing* to address the core issues, me thinks that is a significant high-water mark that the end is near.

remember, just because millions of teenage girls love the backstreet boys doesn't mean they still don't produce wretched music. some things are true whether you believe them or not. Cisco shareholders too will soon have its own "VH1 Behind the Music Special", a double bill with Leif Garrett.

the penalty box? geez, i didn't know you had that kind of pull around here.

well, to borrow a Clint Eastwood line form "Heartbreak Ridge", 'You and kick me, you can beat me, but just don't bore me.'

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USAUTN,

OK - let's start with the penalty box. Look at the top of the page next to the author line - see the frowning face? Good boy, that's called the penalty box - the INDIVIDUAL penalty box. That means when I press that button, your posts are hidden from me alone. Only the TMF staffers can remove you from the board. You still with me?

Your view is contrarian - to the hundreds of posts here on the CSCO board that do nothing but cheer the stock. Being opposed to the pure adoration of CSCO stock is a good thing. You will take some heat from the cheerleaders for opposing their view, but that's ok (as an example, look at the number of replies, some of them very emotional, to the Barron's article that posted a negative view of CSCO). Differing opinions keep things fresh.

As I said before, I agree with the context of your message (CSCO is too expensive and needs to be watched, not rah rah'd to death). Unfortunately, the tenor of your message makes you appear to be someone with an axe to grind, and essentially contains nothing more substantial than negative cheerleading with some insulting language thrown in.

Sorry, unimpresed, back to the penalty box with ya....

relaxed,

rdf
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USAUTN wrote:

I am brand spankin' new to the CSCO board. After digging around a little, it would seem that this board (and most do) has its very own Jim Jones: gmatsumoto

His blustery rebuttal to the Barron's article, ironically, is as specious as the offending document. Me doth think the lady protest too much. Long on Cisco? Good for you. Your collective backs support the collapsing bridge under the terminal strain of the heard of silent, freshly converted, so called smart money 'strong buy' types selling out right from under you.

*************************************************

Your parachute that has permitted you to land on this board has a hole in it. Please hold on tight while the bridge of our little illusions crumbles under the weight of the awsome truth you have deigned to share with us... Hélène
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No. of Recommendations: 6
You missed the main point of my post - take another look. I'm happy to read contrary views on my long investments....i look for these all the time and many times this collective reseach leads me to change my views and adjust my portfolio accordingly.

To be clear, any stock trading at a PEG of this level deserves careful scrutiny and if I there was any evidence that the company wasn't executing its strategy of staying on top of the technologies and products that their customer base is demanding, then all longs might seriously reconsider their position. Problem is, I don't see anything but a strong company getting stronger.

* strong sequential growth across all key product lines

* optical business gaining traction fast

* 12000 Gigabit router continuing its market domination

* access business also growing tremendously

* tremendous balance sheet management - DSO @36 is unheard of for a company this size

* book to bill greater than 1.0

* extremely attractive market growth prospects looking ahead

* ability to identify and execute multiple acquistions like no company that I'm aware of in modern business times

Bottom line is that Barron's has gotten extraordinary attention for an article that was very poorly written and researched...that's my main problem and my post clearly stated this - several times. I think smart investors, short and long, deserve much better fundamental analysis than Mr. Donlan's was able to muster.

Are there risks ahead...sure there are. Higher interest rates will slow the world's economy and has the potential to slow the purchases from Cisco; On the optical side, Cisco has patched together several acquisitions very fast but they appear to be behind the market leaders such as Nortel and CIENA; the component shortages that were mentioned on the conference call could ultimately slow revenue growth and piss off some key customers, but....

As an investor that looks for attractive buy and holds, I would never sell a long position simply because the market capitalization got too high (in my view, market cap is simple a derived calculated number that doesn't tell me much, whereas the key nummerical metrics for me are cash flow generation growth and risk adjusted return on capital) nor would I sell a position simply because the P/E ratio was too high (without looking at the key consideration for me - is the company executing?).

Good luck in your investing pursuits.
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sorry...post 17960 was meant to be addressed to USAUST
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It wouldn`t surprise me that after the big boys make a tidy profit they always sell huge lots ,and then wait on the sidelines for a drop of more then 5.00 before they start picking up goblets of more shares to get rich on .
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