A Cup of Tea and Sympathy
ExcITLENCE IN SHAREHOTDER
C0MMUNrcATroNs Awarded bv lhe Muhra Fund Educillon A liance
0CtlS
h
SPRING 2OO1
A Cup of Tea and Sympathy Some stocks drop on bad news, others get pulled down by sector turbulence
r;-:r'rr
he events
ofrhe
dcscribe rhe phenomenor n thar the srocks
past ycar have letr
'I -.'ni Mrtlc h..rcco :i d.cline'.,.uo,'.pinning. o12000 rv^ led bv rcchnolocl
"in symparhy'rvith -h.n s.unJ.J -omrrde,. I hi, sarr *nrirenr. of m,r+. is of l;rle comlon ro thosc rvho inrcst in rhc symprrheric firms.
srronger comprnies fall
stocks, rhe damage soon spread (in varying
degrcc$ to the rest ofrhe market. Indeed, manv companies rvith vund businesses and srrong fundamentals got caught nr the mrehtrom, dreir forunes sink;ng rlongside rhose olmuch
i
o
h.'. n
goo.l sroclr.
J
\n l,i
Bellwethers and the Cisco Storm A recenr case in poinr is Cisco Slstents. A monun,enr.rl rbrcc nr rhe compurer nenrorking indu*n: Cnco hrd also buik .tn impressile record oftir.rnci,rl snbiliry Over dte past
,.,
pl,,rsc LcqrLcrrh
LLscri
!n Focus A Cup of Tea and Sympathy A look at how sector turbulence can unjustly pu I down some stocks, Page 1
n th-t rl,< .,:.,.r .,r...1.' c.rn bc vcn lnatilc in the dton term. BLrt ir can bc hard ro fathom rvhy bad drings happen
l.,
of
several years,
lir
r.
.
it beat analysr; earnings estimates
18 consrcurnt
r1".r
rL
qurncr: and nret crLuings .. .n rrL,rrr.,r *..
on. 1,r r'. ,,h
'. '
1001, lowcver, Cisco rnnounced errnings per sharc rhat rvere a pcnny lorver thrn rhe market had expecred.
Ciscot stock dcclincd shrrply rfter rhe disappoinorcnt was announced. but the drmage didn'r end thcrc: orher technologr srocks sonc rclarcd ro Ciscos busines, some not wcre s$,epr into a strong dorvndraft. The fact that rcch srocks had alre.rdv suffered through a punisLing year rv.rs pcrhaps the only rhing that contained the damage. The "belhverhei faoor is one erplanatior for rhis and similrr
I
sympathy drops. Cisco is viercd as r lgder in its Ileld. rnd irs n,flucnce can be feh in m.rny areas ofthe economy, both in and outside ofthe rech sector. Invesrors nvson rhrr m:r'lcr lerder crn nrn inro difficulry drcn odrer firms might be even
iir
It
What Makes Nasdaq's Ticker Tick? Get the story behind the
Nasdaq, an lndex that takes the plrlse of the tech no
ogy{riented "New
Economy." Page 2 The Value of valuations As a groMh oriented nvestor, [,1id-Cap GroMh Fund mafager Kevin Sonnett discusses how he ard h s team analyze stock valuations. Page 3
Voting on Exam ning the potent al benefits you could reap from legis aiion the 107th Congress is currenty
considering. Page 4
Bush's Tax Proposal Takes Center Stage President's proposed tax cut and how t might affect you. Page 6
is also useful to reurcmber thar
corporations are, in many rvays, soldiers on rhe economic front lines. Morc rhan likely,
cottinred
on
pagt 7
trDreltrs Foundcrs Frmds
I
Increase in the Child Credit
continued fom page
The per-child crcdit that many parenis can claim is now $500, and Bush would like to double rhis amounl He has also
they will bc rhe first ro feel the sting of higher raw-material costs, rising inreresr
suggested raising the income threshold to take advantage ofrhis credit lrom
1ike.
$110,000 for ioint filers ro $200,000, and lrom $75,000 for single filers ro
$200,000. Funhermore, parens would be able to .rpply this credit agairst the alrernative minimum tar, or AMI rvhen applicable. There seems ro be les controversy over rhis elemenr ofthe proposal, wirh most legnlarors agreeing thrt a higher child credn could help American families.
Extension of Charitable
Cotruiburion Privileges Repealing the esrare rar, as rnentioned earlier, couid cause a declnre in charnable
givnE. Brlsh hopes ro mnlgare ihn possible outcome by increasing the breadth ofcurrcnt rax larvs regaLdnre
charnable donations. Ar a cosr ofS75.8 billion, Busht proposals include lerting non-itemizers rake rhe charirable
conniburion deduction, allowing rax-frcc lM rvirhdrarvals for charitable donations, and providing a ra{ credn for charitable gilis ro anti-povercy charities. Ifyouve madc donarions bur havent itemized rhenl, or ifyour g;ving has been held back by curenr tax larv, rhis extension could make a difference.
An lJnfolding Drama \(uhilc everyone on Capnol Hill seems to feel that some porrion ofrhe budget stuplus should bc used ro cur raxes, rhe quesrions ofhow much and for whom have yer to be noned our. Resolving all ofthe complications could take awhilc,
rates, increasing wage presures, and dre
Ifa prominenr company srumbles one or mde of rhese lmdminesleading, perhaps, ro a disappoinring earnings announcement ir;s likely
ow
ro send a shiver of fear rhroughout the entire market. The marker irselfwill eventudly rcgroup, bur investors wilt be sure to rLead morc lighdy in the rvake
(bel'M/dth'er) n. A psrcon or thtng that assumes leadoEhip. It is interesting to reflect on the origin of the term: A be lwether \ras a ram, fitted with a bell. that ted a itock of sheep, of course, wlthout proper supervision a be lwether was as likely to lead the flock into a ditch as it was to bring then back into the fotd_
Soothing Sympathy Woes When stocks have been caughr in a symparhy downdrafr, ponlolio managers lace a kind of cri* of faith. Do rhey sell in an arrempt to avoid getring hun by the wake ofa sympathy selloff, or do rhey ride out rhe srorm md tocus on the company's long-term porenrial? The mosr importanr thing is to approach rhe issue rationally and not ler emotions overwhelm your decisions. Founders' managemenr ream starrs by answering rhe following questions to help them find the besr course, Are the companies actually connected in some way? In some cases, a srock drops nor out ofsympathy, but
so prepare yourselffor a wait. In rhe
because
meanrime, consider horv the facers of Bush's original proposal might affecr you, while keeping rrack of rhe laresr
small-in common wirh a srock that
plot mists. Founden n not .ngised nr prcyiding a..ound'rg or
.([ic.
I,lere coN']t
a
pmFsi.n.l
rax
tu
ad'irL aoflnor
it
has
the company has exposure to the probl.-m affecting its competitor or if the company is actually benefining lrom ns compernort weaknes. Are the companyt tundamentals
still sound? Thh is perhaps rhe most imporrant question,
as ir may mean the dillerence bemeen a company
experiencing a symparhy drop and something more serious. \7e check into rhe companv to see rvhether its fundamentals rill offcr the potential for long+erm appreciation, rnd rvhether ir's meering earnings expectations. Does our original rationale for buying the stock still hold? \{re always have specific Leasons lor owning a stock-it's the Ieader in ir market, it n an innovator, it has a srrorg brand idcntiry,, and so on. Market slides oller an opporrunity to revisit our rationale for orvning rhe stock. Shoutd we buy more? For rhe long-tem investoa shorr+erm dorvnslides may be excellent bLLying opponuniries. Commirting more asels ro a stock rhat's dorvn can be emotionally difl:iculr; bur ifour beliefin rhe long-term fundamentals is strong, it's an opponuniry we shouldn't ignore. Funhermore, irt been our experience that srocks punished
in
a
symprt\
slide may be among the
But ofcourse, rhe besr guidance when deahrg with sympalhy drops is to focLLs on rhe long term. Through decades of equity erperience, we've found rhar. over dme, the market rends to reward companies that possess rhe lundamental strengrhs th:r drive growth
in earnings per
sharc. h's these companies
rhat we will conrinue to focus on. even if rhey re suffering unirir punhhment
something-large or has
disappoinred. For example, nvo firms may share the same customer base; ifone company cxperiences a slorvdown in sales, rhe other mighr see similar reacrions from irs customers. Ve evaluare rvhether
Ai oaFebnhry 23,2001. Cislo Stsrenn Rx o*o&1 6r' srhn.ed Fund (r I 34q'o). CDfrh tud (+ L629i), fo.s rund Gi.68yo), G.\{h.nd In.ome rund G0.s70,'.), d vonlLyide cmrv(lr tuml (+o.a lo/o). Poiilolio .ompornion and holdi'rg. .ie ibjd ro .hrnge, bsed on mder trnd oih( .ondnior and Jhotrld nor be .on{,!dl a r re.om'neDdrion of rny $.ilic r.trrinl
C0MMUNrcATroNs Awarded bv lhe Muhra Fund Educillon A liance
0CtlS
h
SPRING 2OO1
A Cup of Tea and Sympathy Some stocks drop on bad news, others get pulled down by sector turbulence
r;-:r'rr
he events
ofrhe
dcscribe rhe phenomenor n thar the srocks
past ycar have letr
'I -.'ni Mrtlc h..rcco :i d.cline'.,.uo,'.pinning. o12000 rv^ led bv rcchnolocl
"in symparhy'rvith -h.n s.unJ.J -omrrde,. I hi, sarr *nrirenr. of m,r+. is of l;rle comlon ro thosc rvho inrcst in rhc symprrheric firms.
srronger comprnies fall
stocks, rhe damage soon spread (in varying
degrcc$ to the rest ofrhe market. Indeed, manv companies rvith vund businesses and srrong fundamentals got caught nr the mrehtrom, dreir forunes sink;ng rlongside rhose olmuch
i
o
h.'. n
goo.l sroclr.
J
\n l,i
Bellwethers and the Cisco Storm A recenr case in poinr is Cisco Slstents. A monun,enr.rl rbrcc nr rhe compurer nenrorking indu*n: Cnco hrd also buik .tn impressile record oftir.rnci,rl snbiliry Over dte past
,.,
pl,,rsc LcqrLcrrh
LLscri
!n Focus A Cup of Tea and Sympathy A look at how sector turbulence can unjustly pu I down some stocks, Page 1
n th-t rl,< .,:.,.r .,r...1.' c.rn bc vcn lnatilc in the dton term. BLrt ir can bc hard ro fathom rvhy bad drings happen
l.,
of
several years,
lir
r.
.
it beat analysr; earnings estimates
18 consrcurnt
r1".r
rL
qurncr: and nret crLuings .. .n rrL,rrr.,r *..
on. 1,r r'. ,,h
'. '
1001, lowcver, Cisco rnnounced errnings per sharc rhat rvere a pcnny lorver thrn rhe market had expecred.
Ciscot stock dcclincd shrrply rfter rhe disappoinorcnt was announced. but the drmage didn'r end thcrc: orher technologr srocks sonc rclarcd ro Ciscos busines, some not wcre s$,epr into a strong dorvndraft. The fact that rcch srocks had alre.rdv suffered through a punisLing year rv.rs pcrhaps the only rhing that contained the damage. The "belhverhei faoor is one erplanatior for rhis and similrr
I
sympathy drops. Cisco is viercd as r lgder in its Ileld. rnd irs n,flucnce can be feh in m.rny areas ofthe economy, both in and outside ofthe rech sector. Invesrors nvson rhrr m:r'lcr lerder crn nrn inro difficulry drcn odrer firms might be even
iir
It
What Makes Nasdaq's Ticker Tick? Get the story behind the
Nasdaq, an lndex that takes the plrlse of the tech no
ogy{riented "New
Economy." Page 2 The Value of valuations As a groMh oriented nvestor, [,1id-Cap GroMh Fund mafager Kevin Sonnett discusses how he ard h s team analyze stock valuations. Page 3
Voting on Exam ning the potent al benefits you could reap from legis aiion the 107th Congress is currenty
considering. Page 4
Bush's Tax Proposal Takes Center Stage President's proposed tax cut and how t might affect you. Page 6
is also useful to reurcmber thar
corporations are, in many rvays, soldiers on rhe economic front lines. Morc rhan likely,
cottinred
on
pagt 7
trDreltrs Foundcrs Frmds
I
Increase in the Child Credit
continued fom page
The per-child crcdit that many parenis can claim is now $500, and Bush would like to double rhis amounl He has also
they will bc rhe first ro feel the sting of higher raw-material costs, rising inreresr
suggested raising the income threshold to take advantage ofrhis credit lrom
1ike.
$110,000 for ioint filers ro $200,000, and lrom $75,000 for single filers ro
$200,000. Funhermore, parens would be able to .rpply this credit agairst the alrernative minimum tar, or AMI rvhen applicable. There seems ro be les controversy over rhis elemenr ofthe proposal, wirh most legnlarors agreeing thrt a higher child credn could help American families.
Extension of Charitable
Cotruiburion Privileges Repealing the esrare rar, as rnentioned earlier, couid cause a declnre in charnable
givnE. Brlsh hopes ro mnlgare ihn possible outcome by increasing the breadth ofcurrcnt rax larvs regaLdnre
charnable donations. Ar a cosr ofS75.8 billion, Busht proposals include lerting non-itemizers rake rhe charirable
conniburion deduction, allowing rax-frcc lM rvirhdrarvals for charitable donations, and providing a ra{ credn for charitable gilis ro anti-povercy charities. Ifyouve madc donarions bur havent itemized rhenl, or ifyour g;ving has been held back by curenr tax larv, rhis extension could make a difference.
An lJnfolding Drama \(uhilc everyone on Capnol Hill seems to feel that some porrion ofrhe budget stuplus should bc used ro cur raxes, rhe quesrions ofhow much and for whom have yer to be noned our. Resolving all ofthe complications could take awhilc,
rates, increasing wage presures, and dre
Ifa prominenr company srumbles one or mde of rhese lmdminesleading, perhaps, ro a disappoinring earnings announcement ir;s likely
ow
ro send a shiver of fear rhroughout the entire market. The marker irselfwill eventudly rcgroup, bur investors wilt be sure to rLead morc lighdy in the rvake
(bel'M/dth'er) n. A psrcon or thtng that assumes leadoEhip. It is interesting to reflect on the origin of the term: A be lwether \ras a ram, fitted with a bell. that ted a itock of sheep, of course, wlthout proper supervision a be lwether was as likely to lead the flock into a ditch as it was to bring then back into the fotd_
Soothing Sympathy Woes When stocks have been caughr in a symparhy downdrafr, ponlolio managers lace a kind of cri* of faith. Do rhey sell in an arrempt to avoid getring hun by the wake ofa sympathy selloff, or do rhey ride out rhe srorm md tocus on the company's long-term porenrial? The mosr importanr thing is to approach rhe issue rationally and not ler emotions overwhelm your decisions. Founders' managemenr ream starrs by answering rhe following questions to help them find the besr course, Are the companies actually connected in some way? In some cases, a srock drops nor out ofsympathy, but
so prepare yourselffor a wait. In rhe
because
meanrime, consider horv the facers of Bush's original proposal might affecr you, while keeping rrack of rhe laresr
small-in common wirh a srock that
plot mists. Founden n not .ngised nr prcyiding a..ound'rg or
.([ic.
I,lere coN']t
a
pmFsi.n.l
rax
tu
ad'irL aoflnor
it
has
the company has exposure to the probl.-m affecting its competitor or if the company is actually benefining lrom ns compernort weaknes. Are the companyt tundamentals
still sound? Thh is perhaps rhe most imporrant question,
as ir may mean the dillerence bemeen a company
experiencing a symparhy drop and something more serious. \7e check into rhe companv to see rvhether its fundamentals rill offcr the potential for long+erm appreciation, rnd rvhether ir's meering earnings expectations. Does our original rationale for buying the stock still hold? \{re always have specific Leasons lor owning a stock-it's the Ieader in ir market, it n an innovator, it has a srrorg brand idcntiry,, and so on. Market slides oller an opporrunity to revisit our rationale for orvning rhe stock. Shoutd we buy more? For rhe long-tem investoa shorr+erm dorvnslides may be excellent bLLying opponuniries. Commirting more asels ro a stock rhat's dorvn can be emotionally difl:iculr; bur ifour beliefin rhe long-term fundamentals is strong, it's an opponuniry we shouldn't ignore. Funhermore, irt been our experience that srocks punished
in
a
symprt\
slide may be among the
But ofcourse, rhe besr guidance when deahrg with sympalhy drops is to focLLs on rhe long term. Through decades of equity erperience, we've found rhar. over dme, the market rends to reward companies that possess rhe lundamental strengrhs th:r drive growth
in earnings per
sharc. h's these companies
rhat we will conrinue to focus on. even if rhey re suffering unirir punhhment
something-large or has
disappoinred. For example, nvo firms may share the same customer base; ifone company cxperiences a slorvdown in sales, rhe other mighr see similar reacrions from irs customers. Ve evaluare rvhether
Ai oaFebnhry 23,2001. Cislo Stsrenn Rx o*o&1 6r' srhn.ed Fund (r I 34q'o). CDfrh tud (+ L629i), fo.s rund Gi.68yo), G.\{h.nd In.ome rund G0.s70,'.), d vonlLyide cmrv(lr tuml (+o.a lo/o). Poiilolio .ompornion and holdi'rg. .ie ibjd ro .hrnge, bsed on mder trnd oih( .ondnior and Jhotrld nor be .on{,!dl a r re.om'neDdrion of rny $.ilic r.trrinl
