No Random Walking!

The title of this post can easily be changed to one of the following:

• UTStarcom, once  rated sell at $1 by analysts, zoomed to $2 in two months.
• UTStarcom's price reaches $2, analysts are calling the Company a "significant opportunity"

or either of the following:

• UTStarcom has no future, take profit now
• UTStarcom is still dirt cheap,  deserves a higher valuation

or one of these:

• Value is a trap, there are reasons why companies are sold below cash
• Cash is king - buy more as the share price drops

or even one of these general statements:

• How not to invest in a worst-run company
• How to make money from a worst-run company

Each pair of the statements sounds contradictory and confusing, aren't they? Yes, they are indeed. However they are no more confusing than this argument: all of those statements above are valid statements!

It's been well known for years that UTStarcom is one of the worst run companies in the telecom business and has been bleeding for 17 consecutive quarters. Yet there have been many occasions that money can be made in spite of the bad company performance. In fact this can be said of any "bad companies".

UT's share price has varied between $5.5 to $0.63 in last 12 months. The following things have contributed to the big swing in share price:

1. Continuing operating loss
2. Market inefficiency
3. Low liquidity
4. Investors' sentiment
5. Insiders' knowledge

Notice that I didn't list the financial crisis and the ensuing market crash as a major reason for UTSI's price movement: UTSI would have tanked even if there were no financial crisis.

Of the items listed above, the insiders' knowledge of on-going, behind-scene, events and investors' sentiment are the key factors to explain the big swing in prices.  The following two-year weekly chart illustrates the evolution of the events and sentiment, together with the share price movement.

(The book and cash lines are approximate, source: MSN Money. The link to chart is here.)

Even with the price surge of last two months, I still believe there is more upside. The sub-$1 price shouldn't have happened - it did happen because the insiders knew that the worst wasn't over yet - and now UT is just doing what I call "a relief rally", signaling that all of the negative news (hence negative sentiment) is over for now and, with or without a buyout, the price should move towards its "fair value", which should be around $3 to $4 (On the other hand, any individual shouldn't ever forecast price targets as I've said many times!).

Specifically:

1. Value. Cash at $2.41/share. No debt. Hongzhou building $180m(?), etc. Technologies and intangibles valued at zero. Enterprise value still negative.
2. Always one step behind the curve and feeling the pressure from investors, the Management seems to be  focusing on raising the stock price by cutting costs and raising the possibility of selling the companies. The company has freed hiring in China. Raising stock price above $3 is to the best interest of the current management.
3. Though IPTV is going nowhere in China and India, the small contract with Hainan Telecom provides a glimpse of hope that there might be a new source of revenue coming. The future of 3G is much better than IPTV in China. The best way of increasing stock value is to find extra sources of businesses, as SOHU did a couple of years ago when it started its online game business.
4. Investor's sentiment improving. The possibility (not reality) of becoming break-even or being acquired is enough for the price to getting close to the fair value.
5. Likely case of share price going to the other extreme (how exciting!). Yes, it happens, as it did last year due to the sale of its PCD division!
6. Technically, the up trend  just got started a couple of weeks ago (see chart above).

On the negative side, the following may be the reasons to sell:

1. The "news" is out already:  UT may be looking into the option of selling the company as a whole;
2. The Mobile TV business may never materialize to meaningful scale.
3. Analysts are writing positive comments on UTSI! Words such as "revisited deathbed", "good vibrations" and "significant opportunities" are just some samples. Where were they when it was below $0.8!
4. Last but not the lease, I am writing about it!!! The last time I wrote a lengthy article on UTSI was when it was above $5, just days before it reached the 12-month high!

Let's see how the events will evolve going forward. One thing is clear, investing is never about one's own "fundamental" analysis. It's about collective money flow directed by the underlying fundamental and modulated with investor community's wild sentiment.  So far the money has been moving to the stock. Be patient and be greedy, until the festivity is over (which in UT's case will be over down the road).

P.S.:  My March-2009 letter to UT's management and the Board of Directors:

Dear Mr. Blackmore, Mr. Lu Hongliang and other Board Members,

I am a stockholder of UTStarcom, currently holding a significant number of shares.

After years of losses and under an economic slump that will most likely last a long time, I think it is time for the board and the management to come to the conclusion that the best ting for you to do is to sell the company soon.

Let's face it and accept the fact that the management has repeatedly missed the revenue/earning estimates. Still the management seems to believe (again) that UT will turn around in two years. However the Wall Street believes otherwise, based on the extremely low share price. How can you blame them when the shorts have been right for so many years while the board/management have been always several steps behind the curve?!

I believe the management's seemingly unyielding confidence - or should I say the sense of self-denial -  about the state of the Company may have been the result of you being under the delusion with the UT's products and markets and the underestimation of the unfavorable operating environment it is in. The overconfidence or delusion could have been caused by the field managers who for whatever reason over-promised their technologies and/or the potential of their markets.

Mr. Blackmore bought into that promise when he came on board two years ago. Now it's time for him and the Board to face the reality:

1. UTSI is not a technology leader as you claim to be. UT is a "box maker", not a core technology provider in either IPTV or CDMA. Any competitor such as ZTE and Huawei can do what UT's done and probably in lower cost. 
2. UTSI places high hope on IPTV. While IPTV has been somewhat successful in some countries, it hasn't been so in China and India where UTSI operates. I live in China and have used UTSI's IPTV system in Shanghai. However I doubt that many Chinese would want such a service [for the price it charges]! The war between IPTV and digital cable TV has ended decisively, with IPTV being on the losing side.
3. China and India does not have the high-speed broadband infrastructure that IPTV requires for the foreseable future. It is almost certain that UTSI won't generate much revenue from IPTV in years to come. Even when the demand picks up in a few years, UT will face more competitors with similar or even better technologies.
4. Contrary to UT's claim that UTStarcom is a "brand-name" in China, UT is actually being perceived as a "failed" or "failing" company in the minds of many telecom professionals. This doesn't bode well with national telecom service providers who have long-term viability in mind when it comes to signing deals with equipment providers. Also you cannot blame the Chinese telecom giants when they prefer making deals with native Chinese companies.

I am sure many shareholders have suggested further cost-cutting which to me is a no-brainer! UT is supposed to benefit from having the combination of a superior western management team and cheaper Chinese engineers. In reality it seems to have gone the other way around: a 'mediocre' management - sorry I know that Mr. Blackmore didn't like the word 'mediocre' in the conference call but that's actually a nice word for it in the minds of shareholders - and seemingly unproductive workforce and sales force. Mr. Blackmore also likens UTStarcom to a startup company and I actually like that analogy. However UT hasn't been run like a startup company. No startup company have thousands of employees and pays millions to under-performing managers, especially when the time is tough.

Few telecom equipment makers of the last two decades have done well in the face of tense competition - and many haven't survived - while the world experienced the biggest telecom boom in the history of the human kind! If history is any guide, the odds for UTStarcom to buck the trend is slim, especially when we consider its internal weakness (in technology, markets, scale and cost) and very bad external economic environment.

UTStarcom must cut its operating cost NOW by at least 50% to match with its expected revenues and prepare for the eventual sale of the Company. It's not a bad management decision to give up. Only by doing so would UTstarcom's technologies - and its legacy - survive, not to mention the remaining value for its shareholders, you and me included.

Thanks for reading,

Two-year weekly chart of UUP - US Dollar Index (Bullish) ETF:

Notice the warning signs at the top of the chart. (Earlier false signs may be attributed to lack of data - UUP is only two years old)

http://www.newsweek.com/id/195700 from Newsweek.

Curiosity (and genuine need) led to the surprising discovery: C++ programs compiled under the cygwin environment can be executed directly under Windows, as long as the required DLLs are accessible by the programs. This solved one of my long-standing problems of being forced  to do most of my development and testing work on a remote Unix-based host instead of on my own lap-top.

With this discovery, I, as a Unix lover, can develop my web applications under Unix-like cygwin and test them through a web server running under Windows instead of cygwin.

In fact I went a step further: I canceled my Internet service at home! I believe that spending too much time on the Internet has been bad for my health!