Doc Stone's Bierstube Stock Picks for 2000 -- Part #1
I hope the New Year finds you happy, healthy and flush with cash. Two
out of three isn't bad either. I collected a few shekels last year and
am looking forward to a new year in the Brave New World of investment.
First, allow me to pontificate. The popular wisdom nowadays is that the
bull market run has run to long, and that the law of averages will grind
the market back to historical averages; indeed, there may even be
overshoot to the downside. My answer is this: BULL MARKETS NEVER DIE
OF OLD AGE. Bull markets don't stop because they have run much longer
than the average. The stock averages are not natural phenomenon that
oscillate around some mean. They reflect underlying forces that control
stock behavior. Have human height, weight and longevity oscillated
around a mean for the last century? No, the means have steadily been
increasing because of underlying factors of nutrition, medical care and
more humane child rearing practices. Similarly, the market is driven by
underlying factors. The market will "regress to the mean" only when
this underlying factors regress.
The following 3 factors form the supporting stool of the market:
(1) The cost of capital (aka interest rates)
(2) Rising corporate profits
(3) Market liquidity (how much cash people put to work)
The bull market ends and bear markets begin when 3 conditions prevail:
Interests rates increase, corporate profits slow growth or reverse; and
investors start to take there money out of the market (called "net
outflows"). To be sure, we have started to enter dangerous territory in
2000. The Fed raised interest rates 3 times in 1999, and there is a
bias to raising it again at the next meeting on January 21. The labor
market is also tightening to the point that wages are being raised.
But corporate profits are still rising, and the nation is still treating
the stock market as a savings account. Rather that put money into a CD,
they put it into mutual funds or stocks. So we still have two important
elements in place. And interest rates are now about where they were in
early 1998, a great time for the market.
Overall, I see mixed signals for 2000. Historically, election years have
been great market years, going back to 1907. So that's a plus. But
there are other more negative factors. Despite huge climbs in the
Nasdaq and Dow, the Advance/Decline line (the algebraic sum of daily
stock rises vs. declines across the universe of all stocks) has been
declining since 4/98. This means the the bull market as really
restricted to a narrow range of tech stocks, while the vast majority of
company stock prices has been in decline. This is not good. But how
can that be?? The answer: The averages like the Nasdaq and SP500 are
capitalization weighted. The larger your company and the higher the
stock price of that company, the greater the moves upward in that
weighted average. Microsoft, Intel, Oracle and others have moved the SP
upwards even thought the majority of companies are trading below their
200 day moving averages. It is fair to say that most stocks are in a
bear market, but that has been masked by the stellar performance of
select tech and telecom stocks. Other negative factors include the
relentless decline of the Utility and Transportation averages. These
are not good signs.
So, does this mean the glass is heavy empty or half full? An optimist
could argue that the majority of stocks now have plenty of room to move
to the upside to "catch up" with tech stocks. Pessimists say the tech
stocks will catch the downside slope of most companies.
Me, I say "Put cash to work in the market in 2000, but be careful out
there." I believe 2000 will be a "stock picker's market. That means
you just can't throw money at any stock in an industry group and make
out well. You have to do real research and and concentrate only on
promising, well performing companies. Here are the stocks that I think
will shine in 2000, and if not shine, at least outperform everybody
else.
Note: All current prices are at closing, 12/31/99
Quantum Disk Drive (HDD)
NYSE: $6 15/16
The hard disk drive industry is finally emerging from a destructive
price cutting war that benefited Dell, Gateway and Compaq. Maxtor has
announced the first price increases in years. But Quantum is the only
company actively developing hard drive applications outside of PCs.
They are the ONLY company applying disk drives to the consumer
electronics market. They have exclusive deals with TiVo and Replay
Associates for personal video recorders so heavily advertised on TV. If
you pull up 5 year stock charts for drive makers like WDC, you will see
that when the industry picks up, stock prices really take off (WDC was
$94 back in 1997, it is about $4 now).
Target: $25
Genset (GENXY)
Nasdaq ADR: $19 1/16
Genomic sciences stocks are hot. Stocks like Millennium Pharmaceuticals
(MLNM) and Human Genome Sciences (HGSI) have gone through the roof on a
prayer and a promise. For some reason, GENXY has been overlooked. They
are a French genome company every bit as advanced in their gene mapping
library and techniques as the others. They recently announced the
mapping of genes linked to schizophrenia. They are also developing a
semiconductor chip that will vastly speed up the gene mapping process.
The stock hit a low of $8 last fall from a high of $30 over the summer.
It is coming back strong, but still sits under $20. I started
accumulating at $14 and bought right up to $19.
Target: $100
Cobalt Group (CBLT)
Nasdaq: $9 3/8
This is a recent pick of mine, I recommended at under $8. It is
starting to draw the attention of stock chat rooms and rose as high as
$10 on Thursday. CBLT creates and manages auto dealer websites. They
also manage auto parts inventory through their subsidiary,
partsvoice.com. They make their money by charging monthly base fees for
running websites, at $200 a month. They have signed up (as of 9/31/)
4,600 of the nations 22,000 new car dealers. I expect they will go over
5,000 by 1/31. The beauty here is the "value added" approach: CBLT
offers additional Web based features such as Lead Manager (taking strong
sales leads generated over the Internet, then paging sales people by
beeper or voice mail), and Ad Wizard Gold (revenue generating banner
adds for car lot websites). They offer monthly inventory polling.
These separate services add up. Per economic modeling reports I have
seen, CBLT could generate close to a billion dollars a year in revenues,
and that's just cars. CBLT model could easily extend to power boats,
motorcycles, tractors, heavy equipment, etc. CBLT has to be one of the
most overlooked of the Internet services companies.
Target: $50
Aware (AWRE)
Nasdaq: $36
Aware makes DSL: Digital Subscriber Line devices. There are new
fangled modems that speed up transmission of voice and data over
conventional telephone lines. The DSL standard competes with cable
modems. DSL is the choice of local telephone companies, while cable is
the choice of cable companies. Although my preference is for cable
modem (much faster), there is sufficient room for both in the demand for
wide bandwidth Internet transmission. And DSL requires less
infrastructure build out because the old phone company equipment is in
place, while cable companies have to run extra co-axial cables. AWRE
had a disappointing 1999, getting as high as $83 before collapsing down
to $19. Reason? Phone companies dragging their feet in deploying DSL,
management is just too old and set in their old ways. 2000 will be
different.
Target: $150
Lodgenet (LNET)
Nasdaq: $24 7/8
LNET is constructing part of the information superhighway. They are
wiring hotels and resorts with high speed Internet equipment. They are
installing DSL at some hotels, cable modems at others. More
importantly, they are setting up servers and network appliances to run
Movies on Demand and Nintendo games. This is a big, high margin
activity for hotels. LNET is the only company doing this, and they have
a head start. This is a huge market that is just starting. LNET has
huge growth potential. I picked up my first shares at $18 and add more
at $22. This stock is incredibly CHEAP even by traditional valuation
standards such as PE and price-to-sales ratios. I am buying up to $40.
Target: $100
E-Trade (EGRP)
Nasdaq: $26 1/8
E-Trade is one of the great stock stories of the late 90s. A daring
Internet startup that promised to shake the world of stodgy brokers such
as Merrill Lynch. It did just that, forcing every single broker to
quickly set up Internet trading divisions. But EGRP crumbled this year
precisely because the competition grew so fast. They also announced in
May a merger with Telebank (TBFC), the first Internet Bank. The market
did not like the merger. To date, the two have still not merged,
setting off concerns about management incompetence. My take is this:
Management was inexperienced in dealing with banking issues, and there
is a lot more government red tape in buying a bank than another kind of
company. Further, EGRP is 26% owned by Sofbank, a Japanese concern.
Foreigners cannot own more than 10% of an American bank. This problem
has still not been resolved. This is a risky investment, but keep this
in mind: On-line trading has become a major source of entertainment in
America, it certainly beats Vegas! EGRP benefits from the huge volume
traded on the Nasdaq, and they will further benefit by setting up
operations in foreign countries (like it is already doing in Korea).
After hours trading is the next boom, and EGRP will be there too.
Target: $75
Ashton Technology Group (ASTN)
Nasdaq: $6 5/8
ASTN has two interesting angles. First, they own electronic trading
software called the eVWap system. This is a revolutionary system that
will allow institutional investors (like mutual funds) to buy huge
amounts of stock with reduced cost, and with reduced risk of "front
running". Front running is an illegal tactic by which a broker takes a
huge stock order form a mutual fund, calls up a friend to make a stock
order before the major order is place (thus, placed "in front of" the
big order), and profits from the run up when the big order hits the
wires.VWAP eliminates front running by spread trades around in a manner
that disguises the huge order. Second, ASTN owns Gomez Advisors. This
is a "Consumer's Report" organization that ranks websites. It is well
respected. Gomez.com will go IPO early next year. It should be a hot
IPO, so ASTN is a good way to play it. This is also a very risky stock,
because ASTN has NOT sold the stock trading system yet. THere is no
guarantee it will be. But rumor is that the NY Stock Exchange is in
secret talks to buy the eVWap system. We shall see.
Target: $24
Humana Hospitals (HUM)
NYSE: $8 3/16
Another of my recent Bierstube picks. The story is still intact: The
healthcare industry is terribly beaten down, and stocks are trading far
below BOOK value. HUM is particularly hard hit because of its exposure
to Medicare and a recent lawsuit. But earnings estimates are starting
to rise for the industry as a whole, and insiders have been buying HUM
stock hand over fist, millions of shares in open market purchases.
Folks, the smart money is buying up HUM when everybody else is chasing
Internet stocks. This stock will have a good 2000, at least a double.
Target: $20, maybe $24. |
