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Minyan Mailbag: What Do Infinera's Issues Mean?


Anyone looking under the market's surface can find massive damage to many good companies.

Prof. Udall,

This year sure doesn't look much different than last year for Infinera (INFN). How are you handling the position?

-Minyan D

Minyan D,

Pure and simple, I'm scaling in by small increments, essentially taking trading gains as I get them and allocating them to this name. At some point I'll put some more account capital into them but the relentless selling is just bulldozing the stock currently.

I had thought we would see relief after tax loss selling from its huge secondary was over. So far in 2008 I'm wrong on that call with this name, though other smaller cap names have held up better and the A/D line is a bit better than the market damage from Monday.

Bottom line, anyone looking under the market's surface can find massive damage to many good companies (hundreds of them). Currently, growth rates, promise and even things like net cash per share on the balance sheet don't seem to matter to help a stock find a floor. Even during the crash that bottomed in 2002 many stocks would just quit going down based on a one times PSR plus one times cash level. Or somewhere between one to two times cash even if their revenues were suffering huge declines.

Those ratios don't seem to be holding in today's market environment. I wonder if the Fed is looking at things like this, but somehow I doubt it.

So, sorry for the long winded answer but it all goes together. These small/mid-sized growth stocks, even with great balance sheets, may continue to suffer as no price seems low enough until the Fed does something to give the market some kind of reward for accepting risk.

As I've said before, the real liquidity crisis is actually in the average U.S. public company right now. The values will someday be realized but we have to be careful that some of these names are not going to suffer permanent damage to their business because of what is going on in the broad market, or that this whole thing doesn't implode into some huge self-fulfilling outcome.

Good luck and take care.

-Prof. Udall
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Position in INFN

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