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This newsletter can be viewed at
techstocks.com
The Internet Financial Connection August 19, 1998
Presented by Mark Johnson, Editor of the IFC
techstocks.com
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In This Issue:
1. Tech Stocks Surge Again as Growth Wave
Regains Strength by SI member TechnoWiz
2. PMC-Sierra, Inc.
3. Midway Airlines
4. Delta Woodside Industries
5. Interesting Articles On The Internet by Joe Dancy
6. Highlights on SI: Polymedica
7. Highlights on SI: by Tom Taulli
8. Disclaimer
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1.
techstocks.com
TechnoWiz is a SI member and active
participant. He provides the following
commentary on technology stocks. Below is
his write up.
So far, this week is turning out to be one of
the most important weeks in contemporary
history. Readers of my 'Financial Intelligence'
report, will know that comparisons of the '94
stealth bear market have been made to the
experience of the last four weeks. At the end
of 1994, the new highs new lows numbers
were so shockingly negative, that everyone I
talked to re the prospects of a huge rally,
responded with the words: 'Impossible, under
the circumstances, especially given the weight
of such negative internals and breadth'. Well,
we all know what happened next: The Dow
embarked on a 2000 point non stop express,
without so much as pausing for more than a
100 - 200 point correction along the way.
The other key similarities to that time were
that Wall St was almost universally negative.
The market turnaround that began Monday
has borne a quite distinct resemblance to the
size and power of the liftoff that began at the
end of 1994.
Last week, I suggested we were close to
sentiment levels that prevailed at the end of
1994 and warned that the massive reversal in
sentiment that has taken place since the highs
of last month, was historically almost without
precedent. As the increasing amount of
bearishness crept in, especially late last week
and this past weekend, I reminded readers
that when Wall St gets universally bearish, it's
usually a precursor to a surprise rally that can
be breathtaking at best.
Another argument in support of this is, that
when a market breaks straight from its highs
as this one has just done, a knee jerk rally
back to re-test those highs, is a technical
requisite that somehow always manages in
some way to play itself out. The last two days
of strong upward action may confirm this is
now happening.
Many people may have been caught short and
when a number of Mutual Funds chose to
widely telegraph the fact that were as much as
30 to 40 % in cash it fulfilled the requirements
and conditions that can fuel awe-inspiring
up-moves.
Advance indications of an impending upmove
began to be seen late last week, when some
emerging markets began to show signs of
bottoming without waiting for Wall St to lead
the way. The Yen also put in some efforts to
trade higher and managed a rally of sorts. This
Yen rally has continued to build upon itself
this week and is a very important
development for Wall St and the high tech
industry. A strong recovery in the Yen will
inspire confidence in the rest of Asia and may
be enough to re-stimulate orders for US
products. The slowdown in Asia this year has
created a potentially huge backlog of orders
for upgrades, new plant and equipment that
sooner or later will have to be filled.
What could cement a continuation of this rally
would be a strong recovery in Asian markets
and perhaps a major European bank
following through on last week's rumors with
a rich buyout offer for JP Morgan. As
reported by the BBC over the weekend:
"German invasion of Wall St? Rumors that
Germany's biggest bank, Deutsche Bank,
might buy J.P. Morgan lifted their shares on
Friday".
Click below for the full story:
news.bbc.co.uk
If Deutsche Bank bids between $160 to $200
per share for JPM, it would be a real big
surprise if the value of other US banks were
not to rise sharply in sympathy with such an
unparalleled bid for a Dow component. Such
a dramatic rise in JP Morgan's share price,
should have sufficient positive effect to add
fuel to the upward reaction now in motion. In
addition to this, better than expected earnings
results should continue to propel the chain of
events that could be highly catalytic in nature
to the strength of this up-move.
As pointed out last week: Let's just suppose
that had you had been completely
incommunicado over the past month and then
were shown a chart of say Intel, Compaq or
some Internet stock, you wouldd be hard
pressed to tell (from their robust
performance), any thing bad occurred in the
major market indices over that time.
The continuing strength of the formerly weak
Intel has surprised many observers. However,
its recent strength is a true testament to the
underpinnings that have enabled the Nasdaq
index to remain the strongest of all, with good
reason.
What is really happening here? Since my
mid-June article entitled: 'The Next Great
Growth Wave', Intel has rallied from 65 to
almost 90, CPQ has recovered from 27 to
35, Microsoft rallied from 84 to 120, Cisco
from 80 to 105 and Internet stocks have
soared beyond anyone's wildest expectations:
Amazon.com has gone from 40 to the 140's
and Yahoo and AOL have almost doubled,
again!
Why have these leaders been defying gravity?
The chief reason is because the Internet
continues to grow at a phenomenal rate and
shows no signs of slowing.
But, the real reason I wrote that article is
because I firmly believe that 'Intranets' are
going to be a large part of this next great
growth wave. Now, in the past week the
reality of this notion is beginning to take hold
with an initial force that has already far
exceeded my own expectations. Internet,
(and Intranet stocks), have long taken off and
now comes the announcement last week from
the World's largest conglomerate, that GE
plans to spend $5 Billion dollars to implement
a Worldwide Intranet / Extranet network to
service it's customers and integrate its offices
around the World. If this is not the very
strongest endorsement yet, that this new trend
is not just under way but is poised for liftoff, I
don't know what is. Six months ago, when
Internet stocks were much lower and Intranet
stocks were as yet undiscovered, I highlighted
an article from the BBC entitled: 'Intranets
poised for takeoff'. Those Investors who
purchased shares of any Internet or Intranet
favorites back then, for the most part have
done exceedingly well and many believe that
this is still just the beginning of another major
trend.
With this in mind, now perhaps, we can begin
to understand why stocks like Intel have been
holding up so well in a down market. $5
Billion in Intranet / Extranet expenditure buys
an awful lot of Intel motherboards and
Pentium II processors for all those Quads,
Eights, Twelves and Sixteen processor
servers that are going to be needed for this
new gear. Not to mention all the other
peripherals that will be required to complete
this mammoth undertaking that eclipses all
others in history.
As expected, since the turnaround began on
Monday, these stocks have again
outperformed the rest of the market, and we
now know why, many of the reasons.
For over a year now, Intel has been in a range
between 65 and 95. A breakout over 100
could produce a surprisingly strong rally that
would probably eventually lead the rest of the
market higher. We've seen this video before.
It started in 1995 coincident with the launch
of Windows 95. Remember how disc drive
makers like WDC went from $10 to $50?
Well, we may be in for something of a replay.
The Disc Drive makers are already up 30%
from their August lows, in a 'down' market.
The launch of Windows 98 is bound to have a
similar stimulative effect both in terms of new
sales as well as millions of upgrades from
ancient 3.1's and W 95's. With NT 5.0 not
that far around the corner, a major upgrade of
most office systems should keep things on the
boil.
In June, I wrote this editorial prior to the
launch or Windows 98. Some excerpts:
The Next Great Growth Wave
After briefly reviewing how the accelerating
hi-tech growth wave has unfolded since the
beginning of the decade, I highlighted Intel's
product transitions and how the confluence of
the Internet, Pentium and Windows conspired
to drive the incredible growth wave of the
past three years. Asking what's next? The
reply: Plenty more seems appropriate. Why?
Because, we are really already well into the
next transition to Pentium II and Merced. This
in of itself represents another quantum leap in
computing power, that will Integrate
dynamically with Windows 98 and the
explosion in bandwith that Internet Phase II is
about to usher in with a vengeance. Add to
that the rock bottom memory prices that now
abound and a potent mix that can power 'the
next great growth wave' has been formulated.
There's even more: The next generation of
powerful high speed memory chips is already
close to reality offering up to four gigabits of
Dynamic Random Access Memory, that's
over 100 times the current standard. The
combination of all of this, along with use of
multiple ultra high definition monitors that the
new Windows 98 software now enables,
re-defines the workstation environment, is
likely to provide a computing experience as
yet unimagined by most. In a way one could
describe the next great growth wave equation
as a product of the 100 fold effect: 100 times
early computing power, 100 times the original
internet access speeds and 100 times recent
memory standards. Now slash 80's prices by
up to 90 per cent and affordability goes
through the roof for the whole world.
If you think the last three years saw growth,
you haven't seen anything yet. The new
programs and addons that are likely to be
launched coincident with this new growth
wave, along with the launch of Windows 98,
T 5, improved browsers and unprecedented
high speed internet access, is going to boggle
the mind with a dizzying array of new choices.
The power of Moore's law and its economics
continue to astound and propel the computer
boom that has already brought us this far this
fast.
This next growth wave is going to give us at
least twice, if not three or four times the bang
for our buck as the last one. That in itself is
highly significant and helps to accelerate the
product cycle way beyond anything we have
ever experienced in history.
This will bring unmatched affordability and
power to a whole new generation of Internet
and computer users that will number in the
tens, if not hundreds of millions. That's the
domestic potential. Now factor in the business
requisites and consider the tens of millions of
computers that are already beyond
obsolescence, yet are still in operation all over
the World and you begin to get the picture.
How many of those computers represent
certifiably incompliant year 2000 junk that is
mandatorily replaceable. How many
businesses all around the World need to get
up to speed with the latest generation of
programs, operating systems, Pentium II
processing power and high speed connectivity
to secured Internet and Intranets? Millions
upon millions of upgrades and outright
replacements required and soon.
As I have said many times before, in business
today, if your are not using state the art
technology - your'e dead. This will only
become more and more true, as we approach
the new Century and businesses are forced to
jettison out of date systems and decaying
inventory. The current problems being
experienced in Asia, may have temporarily
delayed replacement, but this will eventually
create a huge new demand from all manner of
businesses and individuals who’ve had
to delay purchases. If Dell computer's
continued growth in Asia is anything to go by,
it's already happening, in spite of all the
alleged turmoil and currency problems.
If you'd like to receive my 'Financial
Intelligence' Email report, please send me a
private message (you must be a SI member)
Member 4185481
with the Email Address to
where you would like it to be sent.
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2.
techstocks.com
Kevin Landis of the Technology Leaders
Fund firsthandfunds.com,
provides the following stock idea on
PMC-Sierra, Inc. (PMCS 39 3/4). Below
is the write up.
PMC-Sierra, Inc. is the primary maker of
semiconductor chips for the communications
and networking industry. Kevin Landis of
the Technology Leaders Fund, says that,
"The next generation of Internet networks will
be packet switched, which use ATM
(Asynchronous Transfer Mode) integrated
circuits. This is where PMC really leads...
They are an Internet infrastructure stock."
Most of the Internet traffic is carried over
ATM networks. As the need for Internet
bandwidth increases, so will the demand for
PMC's chips.
PMC's stock has been under pressure
recently. Kevin notes that there have been
several factors why their stock has been
down from their high of $51 set back in late
June. Two years ago, PMC said they would
discontinue their old product lines and focus
on being only a networking chip company. In
order to avoid badwill with their customers,
they decided to supply them with the older
products, even though the margins for these
products were not that high. "The demand for
their legacy business was high but will be
coming down." This generated the illusion of
slowing growth. PMC acquired two
companies which are not supplying a lot of
revenues and earnings in the short term, but
will be beneficial for longer term growth. They
also hired many employees in order to meet
future growth needs for their business. "To the
untrained eye, they look like a company that
is starting to faulter," he says, "In reality, they
are making all the right moves that will benefit
the future growth of their business."
Kevin also points out that an analyst that
covers PMC (who is a big bull on their
stock), recently floated a rumor that they
might have had a slow month in July. Kevin
argues that PMC went into their recent
quarter (starting in July) with 70% of their
orders in hand. "Even if they had a slow
month, they could still make their quarter
without too much trouble."
PMC has an impressive client list which
includes Lucent Technology, Cisco
Systems, Nortel, Ascend and Newbridge
Networks. Kevin adds that PMC has
established a leadership position with their
customers and that their main driver is the
Internet. "Even though there are unknowns
about Internet traffic and who will win it.
Internet traffic will continue to grow at an
explosive rate."
PMC is the largest position in the
Technology Leaders Fund. Kevin first
started accumlating their shares back in
August, 1996 and has been adding to the
position on the stocks weakness. He feels
comfortable with this year end estimates of
$1.16 and figures they will earn $1.60 in
1999 with their shares hitting $60 during that
time period.
There are threads that discuss PMCS here on SI.
Subject 985
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3.
techstocks.com
Jon Hickman of the StageCoach Strategic
Growth Fund 800-222-8222, provides the
following stock idea on Midway Airlines
Corporation (MDWY 17 1/4). Below is the
write up.
Midway Airlines Corporation is an air
carrier and serves 16 destinations in 8 eastern
states and Mexico. Their hub is based in
Raleigh-Durham International Airport.
"Midway's earnings have been terrific, they
have done everything they said they would do
since they went public last December," says
Jon Hickman of the StageCoach Strategic
Growth Fund.
Everything has been going great for Midway.
On July 29th, they reported 2nd quarter
earnings of $0.54 vs. earnings of $0.40 last
year. On August 11th, they reported that
their load factor for passenger traffic
increased 24% from the previous year. So,
why are the shares of Midway's trading in
the same area they were at the beginning of
January? Jon notes that the whole industry is
doing well and this is one of the small cap
companies that has not been recognized by
Wall Street yet.
Midway has an advantage over other
competing air carrier's. All of their planes are
the same so, maintenance and pilot training
costs are lower than other airlines. Some
other smaller airline carriers, such as Atlantic
Coast Airlines Holdings Inc. and Skywest
Inc., which are larger than Midway but small
when compared to the overall airline industry,
trade at 15 times and 16 times next years
earnings estimates (respectively) while
Midway trades at 9 times Jon's 1999's
estimated earnings of $1.90. He figures they
can grow in the 30% area over the next few
years and see's them trading at 18 times 1999
estimates with their shares hitting the mid 30's
sometime over the next year.
Steven Westberg, senior Vice President and
CFO at Midway feels comfortable with Wall
Street estimates. "Traffic has been great, we
are growing nicely, and we have one of the
youngest jet fleets... The average plane in our
fleet is 3 years old," says Steven.
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4.
techstocks.com
Vincent Sellecchia of the Delafield Fund
delafieldfund.com, provides the
following stock idea on Delta Woodside
Industries (DLW 5). Below is the write up.
Delta Woodside Industries has been a
disappointment for many of their
shareholders. Their stock was trading in the
$12 area back in August of 1994 and has
slowly slithered downward since then to the
$5 area currently. Delta owns and operates
essentially five primary businesses. There is a
woven's, t-shirt, apparel, knit fabric and
Nautilus (fitness equipment) division.
A few months ago, Delta made a decision to
exit their knit and Nautilus business because
they have been losing money. They are in the
process of liquidating their knit business and
trying to sell their Nautilus business. Delta's
total outstanding debt at the end of the 3rd
quarter was $234 million. At the end of the
4th quarter (ending June 30th), it was $194
million. "They will continue to take debt down
sharply," says Vincent Sellecchia of the
Delafield Fund, "They have paid down quite
a bit of debt in the 4th quarter and will pay
down a significant amount of debt in 1999
once their two businesses are completely sold
off."
Delta's wovens business had revenues of
$340 million for fiscal year 1998 (ending in
June). That business earned $46 million for
them. Their t-shirt business had $105 million
in revenues and is in the process of moving
their capacity offshore in order to cut costs.
Vincent notes that business has been losing
money but thinks it will return to profitability in
1999. Their apparel business which goes by
the name "Duck Head," had revenues of $85
million in fiscal 1998 but Vincent thinks they
will have revenues of $100 million + in 1999,
with margins in the mid single digits. He
figures that Delta will earn $1 in 1999 and
has the potential of hitting $10 during that time
period.
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5.
techstocks.com
Joe Dancy of The Lone Star Growth Investor
members.aol.com
provides the following links to Interesting
Articles On The Internet. These articles were
from a daily worldwide search of over 150
newspapers and magazines. Subscriptions to his
newsletter are FREE.
members.aol.com
MARKETS & INVESTING
The single most important factor in investing is time.
It's not stock-picking and certainly not market timing --
trying to guess the short-term direction of stocks. The
trick, if you can call it that, is to buy a piece of a great
corporation and become a partner in its growth over a
long, long period.
washingtonpost.com
Once again, the managers of large amounts of money --
and not the millions of individual investors -- are the
culprits in the latest stock market sell-offs.
herald.com
Small-company stock funds, which have been among the
market downdraft's biggest victims, are shaping up as
one of the most intriguing areas to rejigger, say advisers.
herald.com
ASIA, JAPAN & RUSSIA
Export flows to the Far East begins to slow - while
imports pile into the U.S.
chicagotribune.com
Japan's economy will likely contract 1.7 per cent this
year, though it could start to recover in the second h
alf if the government moves ahead with plans to stimulate
growth, the International Monetary Fund (IMF) said.
straitstimes.asia1.com
"Black Thursday" hits for the Russian financial markets.
chicagotribune.com
Trading in Russian stocks was temporarily halted
because of a sharp selloff by investors fearful that the
economy is not strong enough to withstand capital flight
in emerging markets.
globe.com
The Russian government moved hastily to avert financial
collapse with a series of drastic measures, including
delaying payments for 90 days on foreign debt owed
mostly by banks, a restructuring of government bonds
and the sacrifice of the ruble to market forces.
mercurycenter.com
Russia's ruble devaluation, just a month after promises
of an additional $22.6 billion from the International
Monetary Fund, dramatically underscores that the United
States and its rich allies are rapidly running out of
solutions to halt a deepening global economic crisis.
herald.com
The Global Economy is careening toward disaster, and
the Clintonites seem clueless about how to stop it.
mercurycenter.com
ECONOMIC
A small but growing number of economists and market
experts are beginning to worry about the danger of a
"wealth shock," in which a sudden drop in share prices
spooks investors, prompting them to sharply rein in
spending.
washingtonpost.com
Asian crisis limiting Fed's ability to raise interest rates
globe.com
As the worldwide economic crisis looms larger, analysts
say the only way to avoid a major explosion is to move
to lower interest rates in the world's major economies.
canoe.com
Global forces driving taxes on savings down towards
zero.
independent.co.uk
While generalized price declines have not been seen since
the 1930s, the smell of deflation is now strong enough to
make it worth thinking about how standard economic
operating procedures change when selling prices start to
fall.
boston.com
Analysts: Economy not tied to fate of President Clinton
dallasnews.com
Y2K
A test simulating trading on Wall Street around the start
of the millennium showed that some firms with the best
resources to overcome year 2000 computer problems
couldn't handle the transactions smoothly.
triblive.com
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6.
techstocks.com
Sam is an active participant on the The
Stock for 1998 (Polymedica) PM
(Diabetic Supply Co.) thread here on SI.
He provides the following commentary on
PolyMedica (PM 9 5/16). Below is his write
up.
"My creativity seminar company, The Idea
Network, teaches individuals and companies
how to become leaders in their field. I have
been asked by Silicon Investor to discuss
Polymedica (PM- Amex). I am going to
discuss the company in terms of the lessons
taught in the seminar.
The way to become a leader is simple: figure
out who is in the parade, who in the parade
your company can serve, where the parade is
going, which parking lot to run across to get in
front of the parade and finally how to delight
your parade so you can stay in front. |
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