From “Up and Down Wall Street”
By ALAN ABELSON
DECEMBER 25, 2000

…a heck of a lot of stocks have been beaten down to pancake levels and, inevitably, a number of them didn't deserve quite the pummeling they got. So, a little better feeling in these parts could translate into some fair-sized bounces.

In short, the market seems due, overdue perhaps, for a reasonable rebound. Since we're convinced that the worst has yet to come, we'd view a recovery as a heaven-sent opportunity to lighten up. But in any event, it's one of those times when it seems less than prudent to short.

The most tempting place to rummage for bargains is, obviously, the techs. Amid the ruins and the rubble, there are likely to be a few roughed-up diamonds.

A money manager named Kevin O'Grady has been doing just that. That doesn't make him unique, of course. But what Kevin brings to the task makes him unusual and worthy of note. For one thing, he's very well versed in things technological. For another, he's a very canny investor.

So far this year -- and this year doesn't have much farther to go -- he's up a cool 75% and most of that was racked up shorting tech stocks, conspicuously including the Internet variety.¹ He manages a private investment fund known as Churchill Associates and most of the dough is from family and friends.

Not the least of Kevin's virtues as an investor, apart from being bright and knowledgeable, is that he's low-key and flexible: When the facts and the environment change, so does he. Right now, for example, he's 80% long after being net short earlier in the year.

Kevin explains the switch this way: "Excesses on the upside in the technology sector are in many cases being replaced by excesses in the downside." And he cites as an example of the latter the stock of a company called Adtran.

Back in the spring, the shares sold above 80. And that certainly to our jaundiced eye was a case of upside excess. But this past week, the stock broke 17. Which Kevin views as a downside excess. (Friday, it closed at 18 and change.)

What brought Adtran down from the giddy heights was the fall from favor of techs generally and, even worse, its exposure to the dread telecommunications market. More recently, the shares got clobbered when the company revised its estimates for the fourth quarter, to between 16 and 20 cents a share, from analysts' guesses of 55 cents, and lowered its sights for 2001.

Not surprisingly, by way of explanation, management cited "short-term" trends in the telecommunications market. Adtran, we should note, makes high-speed digital transmission products for use by telephone companies and corporate customers.

Kevin points out that over the past six years, revenues have grown at a 17% compounded rate (to around $450 million) and, even with the aforementioned shortfall, earnings during this span have risen 22% compounded, to about $1.60 a share. The lowest line on '01, he says, is $1.40.

But neither this year's disappointment nor next year's lower estimate cools his affection for the stock. Revenues, he contends, will grow 20%-25% a year over the next five years and Adtran has been impressively profitable and consistently captured market share. By his lights, that's worth a lot more than the 50% or so of the company's growth rate the stock currently fetches.

Adtran shares, he feels, are a good bet to double within six to 12 months², even if the tech sector is weak. It's a stock, as he puts it, that you can buy now and still sleep well at night.

What more can you ask?

¹  For 2000, accounts in which short-selling was permitted gained 84.1%. Because long-only accounts lost 17.6%, aggregate performance for all accounts under management in 2000 was +19.7% vs. -9.1% for the S&P500.

²  In the succeeding 12 months, Adtran gained 55%. Adtran doubled in 25 months and quadrupled within 34 months.