ADCT Highlights Picking Stocks is Hard

ADC Telecommunications (ADCT) is a telecom company headquartered within walking distance of where I live, and it was recently purchased by Tyco Electronics (TEL) for $1.25B. I often jog by its sprawling 90 acre headquarters and long noticed that very few people actually worked there. I talked to people who did work there (eg, at my gym), and it always sounded like such people were looking to get out, or were being downsized. They trademark lots of minor innovations, like their OmniReach® FTTX Infrastructure Solutions, which to me highlights that their strategy was built on stupid marketing and legal basis, as opposed to merely providing high quality hardware efficiently.

In sum, they were a perfect short. They were caught up in the internet bubble and had the typical income pattern there, yet even post-2002 they cumulatively lost $315 million. Given the opportunity cost of capital this means they destroyed about half a billion since the post-bubble executive team got in there.

But, their stock price always remained pretty stable, around $10 to $20 (it was split adjusted a while back), recently taken out at $12.5. They were a classic short, in that their business model was pure gimmicks, you look in the company headquarters parking lot and saw no one, people who worked their were dispirited, and true to form, never made money. But, you also would have not made much money shorting them.

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About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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