With high flying stocks, most buy arguments are actually sell arguments

I've been meaning to write for a while. Now Jamie Powell of FT Alphaville has done most of the work for me.

In the annals of investing literature, there are a few lessons which stick out. But perhaps none more so than the adage that at the right price, every asset is potentially a good investment. Even subprime CDOs. The flip side of this axiom is, of course, that if you pay too much the experience can be a painful one.

At the turn of the new millennium, the IT hardware, software and networking equipment company was one of the hottest stocks in the US equity market. From the beginning of 1999 to March 2000 the shares rose 236 per cent to a market capitalisation of $555bn, or $80.06 per share, backed by a crazed-enthusiasm for the technological shifts bought about by the internet. The thesis was solid: as a provider of networking equipment for both telecom players and other businesses, Cisco was the shovel-seller in a dot com gold rush. What could go wrong?

And, some might argue, it had the numbers to back it up. In the 2000 financial year, Cisco posted revenue growth of 55 per cent, gross margins of 66 per cent and had a return-on-equity of 14 per cent. Sure, top-line growth had slowed from 1994 when revenue had doubled, but as one of the few players sitting at the intersection of several technological trends, it surely was going to be one of the (Read more...)