Taking Stock / If the Market Is Mad

Yanky Margalit has a problem: The painful memories of the high-tech bubble are still fresh. And he has another problem: He doesn't know how to talk with Wall Street.

On Monday, after the shares of the software company he heads had doubled within two months, lifting Aladdin Knowledge Systems' (Nasdaq: ALDN) market cap to $200 million, four times sales and 78 times profits, Margalit was asked for explanations.

He began by saying he'd met with dozens of analysts lately, "because I thought a correction was due relative to our performance." He added, "Aladdin rose strongly, but it is still trading at lower multiples than peer companies."

Then he slipped up. His common sense, or maybe his conscience, suddenly made an appearance: "If the whole market is going crazy, then Aladdin deserves some of the madness too."

Put otherwise, when Yanky Margalit, who has headed Aladdin since its establishment 15 years ago, looks at the company's ability to generate earnings, and its market value on Wall Street, he can't see a connection.

Aladdin is an excellent company. From quarter to quarter, it goes from good to better. It finished 2003 with net profits of $2.7 million. But from there to a market value of $200 million, the road looks long indeed.

Yet his little slip of the tongue didn't impact Wall Street, because it's back to its old tricks. Investors aren't looking at company values; they're examining companies relative to their peers, which are also being evaluated on a relative basis - and round and round it goes. Investors aren't looking at absolute profits relative to its market value, only at sequential quarterly growth. Investors aren't evaluating opportunities and risks; they're just asking whether a company beat analysts' expectations - and as we know, analysts' expectations are based on management guidance.

If the market has gone mad, Gil Agmon, for one, knows what to do. A little over a year ago, Agmon, the chief executive of Delek Automotive (TASE: DLEA), increased his stake in the company by 5 percent, buying the shares from Bank Hapoalim for NIS 13 each. On Tuesday morning, he sold those shares for NIS 36 apiece; and this, after the company had paid dividends of NIS 3 per share during the year.

Two months ago, at a presentation to investors, Agmon declared that the coming three years would be the best Delek Automotive had ever seen. Agmon understands the market and knows how to present guidance; but however wondrous or otherwise the next three years will be, Agmon clearly prefers to start them with more cash and less shares.

His ride on Delek Automotive stock left him NIS 90 million richer, a yield of several hundred percent - if we recall that he borrowed money to buy the shares and that Delek Automotive guaranteed only 20 percent of the loan.

NIS 90 million is nothing to sneeze at. It is hard to think of anybody who made anything like that from a Tel Aviv stock in such a short period of time.

For the sake of comparison, people have been enviously grousing for months about the amazing timing at which Zadik Bino bought FIBI Holdings (TASE: FIBI), and Nochi Dankner's luck in timing his purchase of IDB Holding Corporation (TASE: IDBH). But neither stands to make returns like Agmon's.

Even in terms of absolute gain, what Agmon took home is about the same as what the two would recoup if they sold their investments today at market value.