Readers may recall our "where there is smoke..." commentary around UBS last Spring and early Summer that developed into useful short hedge to both our inherent Euro-zone exposure with ALU and the broader macro issues emanating from Europe and affecting the US market. At that time, catalysts for that view were multiple missteps at the investment bank, including the mismanagement of the SQNS IPO (see update 4/28/11- exacerbated by its subsequent implosion to below $3 as HTC/WiMax weaknened, where we actually own a little down here on a TD-LTE baseband technology take out thesis), role as advisor to a weak ARRS team looking to buy and even weaker SEAC business (see 5/30/11 update), status as the last of eight bulge names on the awful FSL IPO (see 5/25/11 blog post) and accounts of multiple banking team departures. Further catalysts included a share price closer to highs than lows in the high teens, and of course a burgeoning financial crisis in Europe.
Aided by fortuitous timing, the result was a near 50% decline in share price to the lows, and while many of the negatives remain amid apparent complacency around Europe at present, we have found more attractive hedge exposure from a currency, geography and fundamental technology standpoint in the form of ST Micro. Though as will be amply evident in our upcoming Q1 review and outlook, timing has not been on our side in that case with the shares representing our worst performer on a weighted basis. We remain, however, completely undeterred despite recent share price strength and look to add up here in the $8's to STM.
Based on what we saw in Barrons this weekend, we may have a similar thesis coming together around T Rowe Price (TROW $64.02 $16.2B cap). In a feature story on large cap stocks, TROW Large Cap Value Fund Manager Mark Finn is interviewed and expresses his positive views on both DELL and CSCO, and we heartily agree on both counts especially as regards the leaders of both organizations. Where it gets interesting however, is when Finn goes on to describe some of the fundamental reasons behind his bullish Cisco view. They include
(1) opportunities afforded by stumbles from competitor Juniper and
(2) Cisco's ability to fend off competitive threats from JDS Uniphase
(3) yes that's right, number two says JDS Uniphase, repeated three times in the article
Guy owns $1.2B of CSCO stock, a top six holder, and thinks they compete with JDSU. Morever, the article lauds TROW's analytical capabilities in determining that said competitive threat was overstated. Overstated indeed, it does not exist. For the record, JDSU sells optical components and test gear to Cisco, and in no way competes with them.
The Juniper point is even more interesting, as the article points to the Summer of 2011 when CSCO was around $15 as the time when this analysis was going on. Finn notes that his internal analyst opined at the time that JNPR might stumble with its new products, a sentiment with which we obviously wholeheartedly agree, making a CSCO recovery more likely. That sentiment was apparently not shared with TROW Global Technology Fund PM Dave Eiswert, who appeared in the very same pages of Barron's in mid May (see Terrapin update 5/15/11) extolling the virtues of the shares around $40 along with the CEO and several analysts. Apparently the word still hasn't gotten down the hallway in Bmore, given that as of year end, TROW is also the largest holder of JNPR with an astounding 14% of the shares outstanding.
So there we have it; in a nutshell TROW doesn't know what it owns, both individually and in the aggregate. Now this is a narrow slice of tech and only a couple data points, though with two very, very prominent names (if we were to read that ORCL competes with MU would it be time to hit the panic button?) , but represents just the sort of smoke we saw at the ground level with UBS. Add a decent helping of parochial (nearly everyone senior at TROW is a lifer) and opaque (apparently things are going so well there is no need for troublesome earnings conference calls) and we are getting intrigued. Garnish with continued retail reluctance to buy into the recent rally and majority revenue exposure at TROW to mutual funds, even more interesting.
As with the UBS scenario, this smoke comes with a potentially fortunate backdrop in terms of timing and broader macro events. TROW is indeed far closer to highs than lows, as is most everything, and given its fundamental proximity to broader market moves offers greater exposure to a pull back that we feel is richly deserved. While this comment is on the blog for a reason, it's a new area of focus where we are finding our way, there is enough here for a starter short position and a closer consideration of whether TROW might be an effective broader market hedge in 2012.
A final note on Terrapin positioning in some of the tech names discussed above. We have discussed the CSCO/JNPR pair ad nauseum, though recently have moderated the intensity of our short on JNPR a bit as the shares have approached parity and amid some more IP friendly carrier data points of late. We however continue to struggle with the basis for the 2X P/E valuation premium in JNPR shares relative to CSCO. We also continue to maintain a small short position in JDSU, though not due to their inability to compete with CSCO but as a result of medium term concerns around OEM vertical integration (including CSCO, though more in the datacom space where JDS doesn't play much) in the optical space as well as potential pressure from industry consolidation.