Investment Opinion
FOOL PLATE SPECIAL

Price/Research Ratio

Although famous for making the Price/Sales Ratio (PSR) a household word, Ken Fisher also popularized another valuation tool that is not as commonly used -- the Price/Research Ratio.

For those who might be familiar with the concept of measuring the value of a company by looking at its research budget, you might know this as the M Ratio. Michael Murphy simply modified Fisher's original work to come up with his own branded variation, although any student of investment history knows whose work came first chronologically.

The Price/Research Ratio is intended to measure the value of technology companies. Fisher's thesis is simple -- research and development is not a pure, abstract science. Rather, the best research and development targets a particular market and creates a high-margin product to fill that market need. For Fisher, research, development and marketing all go hand in hand, and a look at research spending gives an eye toward a company's proper valuation.

Fisher simply takes the last four quarters' worth of research and development and measures it against the market capitalization. If Larry's Lasers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LAZR)") else Response.Write("(NASDAQ: LAZR)") end if %> has spent $10 million on research and development in the past four quarters and currently has a market capitalization of $100 million, then the Price/Research Ratio is 10.0.

Price $100 million

-------------- = ----------------- = 10.0

Research $10 million

Fisher believes the Price/Research Ratio confirms value in a company with a low Price/Sales Ratio, rather than working as a measure of value on its own. Thus, he looks for companies trading below 0.75 times sales and then checks to see if they have Price/Research Ratios below 15.0. The lower, obviously, the better, although around 10.0 or so is normally considered good. Investors scanning battered technology companies for value might want to add the Price/Research Ratio to their arsenal.

UPS

SYSTEMSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYSF)") else Response.Write("(NASDAQ: SYSF)") end if %> unveiled its new SystemWizard today, which diagnoses and corrects common PC problems. Also announced were deals and contracts with many major players, like AST, Digital, and Wang, and a 2-for-1 split. Shares jumped $1 3/4 to $49.

Shares of PROXIMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PROX)") else Response.Write("(NASDAQ: PROX)") end if %> keep rising, today up $4 to $28, two days after a joint venture with ALLTELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AT)") else Response.Write("(NYSE: AT)") end if %> to offer integrated healthcare solutions was announced.

JABIL CIRCUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %> blew away estimates today, posting $0.33 per share when analysts only expected $0.15. Revenues were four times their year-ago levels, and shares popped up $1 3/16 to $13 1/4

Shares of storage technology firm IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> recovered $2 7/8 to $29 5/8 after yesterday's drop of over $10. The company announced new products and deals yesterday at the PC Expo.

Profiled in Investor's Business Daily, SAWTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAWS)") else Response.Write("(NASDAQ: SAWS)") end if %> shares advanced $2 1/2 to $29 1/2.

LUMISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LUMI)") else Response.Write("(NASDAQ: LUMI)") end if %> was upgraded from "buy" to "strong buy" by Volpe Welty, and shares rose $1 1/4 to $14 7/8.

DOWNS

Machine vision firm PPT VISION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PPTV)") else Response.Write("(NASDAQ: PPTV)") end if %> announced an offering of 1.6 million shares, and its price dropped $1 7/8 to $12 1/8, presumably on concerns of dilution.

Digital printing company XEIKON NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XEIKY)") else Response.Write("(NASDAQ: XEIKY)") end if %> warned of disappointing earnings due to a short-term slowing of demand, and and saw its shares plunge $8 5/8 to $13 1/4.

COMPUSERVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSRV)") else Response.Write("(NASDAQ: CSRV)") end if %> fell $1 7/8 to $21 3/8 despite announcing that fourth quarter losses were kept to $0.02 per share, better than the $0.06 that analysts were expecting.

Printing technology concern PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> continues to slide, down $4 7/8 to $51 1/8. The company is restating its first quarter earnings downward.

Medical supply company MINNTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MNTX)") else Response.Write("(NASDAQ: MNTX)") end if %> reported earnings of $0.07 per share, well short of the $0.24 expected, and was penalized with a $2 1/2 to $12 1/2 drop.

Randy Befumo (MF Templar), a Fool
Selena Maranjian (MF Selena), another Fool