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Stocks in Focus Jan 7 2000 3:15PM CST Archives...
The WallStreetCity Aggressive Ten for 2000
by Blair G. Jeffery, Margaret Medina, Don Diaz, Charles Rotblut, Chris Connor, Gardner Landry, & Theo Spradlin
The Wall Street City Aggressive Ten is a portfolio of ascendant stocks that are expected to outperform the broader market averages over the course of 2000. These securities were selected by group consensus among the entire team of Wall Street City analysts and editors on the basis of business models, underlying fundamentals, and technical strength. In general, all of the stocks listed below represent companies that are either current market leaders or are positioned to capitalize on rapid growth in specific sector niches.
The portfolio was constructed with an investment horizon of twelve months and does not involve the use of options or other hedging instruments. Although diversification was considered, it was not a determining factor as the goal of this portfolio is to provide investors with a list of outstanding investment candidates that warrant further research.
Company Ticker Price* Comment
Brocade BRCD 177 The leading SAN company in the world
RSA Security RSAS 77-1/2 Secure data transmission key focus for RSA Security
Valence Technology VLNC 19 Top beneficiary of the need for cell phone batteries
Global Crossing GBLX 50 10,000 leagues under the sea and loving it
Qualcomm QCOM 176-1/8 Qualcomm reigns with CDMA technology
Network Appliance NTAP 83-1/16 Faster network access creates needs for company's products
Silicon Storage Tech SSTI 41-1/4 The memory maker of choice for wireless products
Puma Technology PUMA 130-5/8 Leading developer of products for the new era of wireless interconnectivity
California Amplifier CAMP 26-5/16 The up and coming microwave technology company
Globalstar Telecom GSTRF 44 Mobile communications service anywhere in the world.
*Prices as of 12/31/99
THE LIST
Brocade {BRCD}
By far the leading Storage Area Network (SAN) company in the world, providing the all-important fibre channel fabric switches and SAN management software products to such heavyweights as IBM {IBM}, Data General of EMC {EMC}, Dell Computer {DELL} and Compaq Computer {CPQ}. Brocade appears to be firmly in the driver's seat of the SAN market with 6 consecutive quarters of sequential revenue growth. Over the last two quarters, revenue growth has accelerated dramatically. Brocade has also grown revenues rapidly on a year over year basis. Looking ahead, analysts estimate that Brocade will grow earnings 42.5 percent per year over the next 5 years. These estimates could prove to be conservative if the SAN market proves to be more than a niche market over the long term.
Brocade looks like the premier stock in the SAN space because of its rapidly accelerating growth and its dominant position in the fibre channel switch market. As the SAN market continues to grow, Brocade will continue its impressive acceleration. The firm is well-managed and positioned for further growth into the future.
RSA Security {RSAS}
RSA Security Inc. {RSAS}, formerly Security Dynamics Technologies, has seen its price appreciate 192 percent over the past 52 weeks. The company provides security products in three key areas: public key infrastructure (PKI), authentication, and encryption. PKI allows users to authenticate and identify each other in Internet transactions.
The acronym RSA stands for Rivest, Shamin, and Adelman - the inventors of the public key encryption technology that is used in such well known applications as Microsoft Windows NT, Netscape Navigator, Microsoft Internet Explorer and Quicken. RSA technology is the standard used for secure communication and e-commerce conducted on the Internet today and is considered so powerful that the U.S. government restricts its export to other countries.
{RSAS} has three main product lines: RSA SecurID and ACE/Server (hardware and software authentication products), RSA BSAFE (encryption products) and RSA Keon (PKI software products). Its products are sold to over 5000 customers worldwide and the RSA encryption technology is licensed to over 400 OEMs. No customer accounted for more than 5 percent of its revenue and the percentage of sales outside the U.S. (34.6 percent in 1998) is increasing each year. RSAS's growth is being driven by the burgeoning of corporate intranets and extranets and the Internet. One third of the company's workforce is devoted to research and development and the company has formed strategic partnerships with powerhouses such as Cisco, Microsoft, Intel, Oracle, IBM, NEC, Compaq and Microsoft to make RSA Security's products interoperable with these vendors' products.
Gross profits as a percentage of revenue have averaged 78.1 percent from 1996 to 1999. The majority of the company's revenues are generated from SecurID tokens and license fees from its encryption and ACE/Server products. For the nine months ended September 1999, revenues rose 25 percent to $156.1 million and nine month EPS increased to $3.44 versus $0.40 (including a non-recurring gain of $51.2 million). The company has no long term debt and in October announced a buyback of up to 4 million shares. The company's next earnings report is due in January. EPS Estimates for the fourth quarter of FY 1999 are for $0.22, with $0.66 and $0.85 estimated for FY 1999 and 2000.
Valence Technology {VLNC}
Valence possesses more upside potential than any other battery stock due to its hundreds of patents involving lithium polymer (the safest and highest performing battery type) technology, its ramping up of production with joint-venture partners, and its substantial early purchase orders. The most glaring major risk with this company is that it has a mountain of debt with a total debt to equity ratio of 3.43. However, this number should decline as the company ramps up its production and begins selling products.
Global Crossing {GBLX}
One of the world's fastest growing telecommunications companies, Global Crossing specializes in undersea digital fiber-optic cable services and associated terrestrial backhaul capacity. Undersea telecommunications capacity is a relatively new system for most telecom companies, yet Global Crossing has been operating underwater for more than two years. In that time, the company has positioned itself as the pre-eminent international undersea fiber-optic telecommunications systems and services firm in the world.
Financially, the company has yet to realize the full boom of this industry-leading system. However, the public is starting to catch on to this phenom with the help of analyst coverage and the companies stronger marketing skills. GBLX is on pace to post a profit this year for the first time in the company's short publicly traded history - a sign of increasing strength. Analysts project the company will expand earnings at a 37 percent clip for the next five years, but given the telecom industry's ever expanding reach and Global Crossing's hand in all future capacity enlargements, analysts could be underestimating the firm's growth potential. Either way, WallStreetCity analysts feel Global Crossing will start realizing some of its potential in the next twelve months if not sooner.
Qualcomm {QCOM}
Qualcomm's {QCOM} proprietary Code Division Multiple Access (CDMA) technology has been the primary driver in the company's success. With the number of wireless subscribers expected to reach 550 million in the year 2000, QCOM is well positioned to benefit from the growth in wireless communications because its CDMA technology has been adopted as the industry standard for digital cellular, Personal Communication Services (PCS) and other wireless services. Qualcomm employs the CDMA technology in a variety of applications. The company licenses and receives royalty payments from telecommunications equipment suppliers for its CDMA technology and is the leading supplier of CDMA chipsets. Qualcomm also holds a 6.4 percent interest in Globalstar {GSTRF}. Globalstar's 48 satellite system utilizing CDMA technology will enable users to call, fax and send data virtually anywhere in the world at a cost of about $1.50 a minute. Qualcomm will manufacture and supply mobile and fixed CDMA phones for the Globalstar network. The technology is also used in Qualcomm's OmniTRACS system, which is a satellite-based message transmission and position tracking system used by trucking companies to allow dispatchers to remain in constant communication with their fleets. The system is currently used in over 37 countries.
Total revenues for fiscal year 1999 increased by $589 million to $3.9 billion. The company cites increased growth in sales from CDMA chipsets and phone products, increase in royalties and deployment of Globalstar gateways as reasons for the increase. Net income rose 85 percent from $109 million to $201 million. EPS increased 69 percent to $1.24 from $0.73 in 1998. The five year growth rate is estimated at 34.9 percent with EPS projections for FY 2000 and 2001 at $3.94 and $4.91, respectively. Qualcomm's stock price has zoomed over 2000 percent since the beginning of 1999 and, as of December 29, 1999, was trading at a new high of 662. The company announced a 4-for-1 stock split effective December 31, 1999.
Network Appliance {NTAP}
Network Appliance is the leading supplier of filers, which are network attached data storage and access devices. These devices quicken network and internet access by facilitating the storage of data at centralized locations as opposed to having the data placed sporadically across the network. The need for these products arises from the demands placed on stored data as the growth of the Internet and corporate intranets continues to burgeon. Simply put, as businesses become more and more reliant on information, the importance of retrieving data at ultra high speeds increases exponentially.
Although NTAP is expensive on a valuation basis, even when considering the forward-looking P/E multiple, the company has a history of performing well. Over the past 14 quarters, revenues have increased sequentially. OEM agreements signed with Dell Computer and Fujistu are likely to cause the strong revenue growth trend to continue over the next few years. The forecast five-year growth rate is 48.1 percent, though investors may want to note that NTAP has beaten the consensus estimates by $0.02 during both FY 2000 Q1 and FY 2000 Q2.
Silicon Storage {SSTI}
SSTI is the pre-eminent storage maker for the wireless industry due to its relationship with wireless powerhouse Qualcomm {QCOM}. Silicon Storage makes flash memory products based on its patented SuperFlash technology. Flash memory is perfect for wireless devices like Palm Pilots and wireless phones because its products use little space, are removable, and retain data even when its power source is turned off.
Silicon Storage also has a significant presence in smart cards due to its licensing agreement with ATMI {ATMI}. According to the agreement, ATMI will license SuperFlash for use in its smart cards. A smart card is an electronic device that is about the size of a credit card. This card contains electronic memory and can include an embedded integrated circuit. Smart cards are used for various applications such as storing digital or cyber cash, storing medical records for patients, and as IDs for entrance into secure areas.
Puma Technology {PUMA}
With the shift in paradigms that is currently underway in the software industry brought about by the open code revolution and the advent of web-based software and applications as a viable alternative to the Microsoft empire, Puma Technology, Inc. is poised to benefit from its foresight and development of software products for the next generation of connectivity that is on the horizon. This shift of power in the software industry coupled with the growing feasibility and predominance of small, powerful hand-held devices (made possible by advancements in integrated circuit technology) that may access data, networks, LANs and even the Internet remotely finds PUMA in the right place at the right time. Wireless connections made possible by Qualcomm's CDMA (Code Division Multiple Access) technology coupled with advanced microwave transmission techniques will allow access to data through this new generation of computing devices. If PUMA has its way, their software and applications will be an integral part of this convergence of technologies.
PUMA is a leading developer of products for the new era of wireless interconnectivity. Their products offer local, LAN, and remote data synchronization between the new generation of hand-held devices and both PC and server-based applications. PUMA also offers an infrared-based wireless solution that enables connectivity for file exchange and printing within close quarters free of cables or lines. The company offers software developer's kits which enable hardware and software manufacturers to establish compatibility with PUMA's products in the early stages of product development. This ensures that PUMA will be viable software option for end users of new products. This licensing of development kits is an important component of the PUMA business model which ensures PUMA a position of predominance within the new arena of small hand-held computing and communications devices.
The company offers products for a long list of OEMs and software platforms including: 3Com's Palm Pilot, Windows CE devices, Nokia, Sharp, Texas Instruments, REX, Hewlett Packard Palm Top, AT&T, Orchestrate, SDK, and Lotus Notes. The company also boasts business relationships throughout a broad spectrum of industries with business associates like Amazon.com, Qualcomm, Sprint, GE, Goldman Sachs, Cisco Systems, United Technologies, Anderson Consulting, and Baan.
California Amplifier {CAMP}
California Amplifier designs and manufactures microwave products used in the reception of video transmitted from satellites or wireless ground units. The company also makes antennas used in global positioning systems. CAMP operates under three business units: The satellite unit provides subscriber components such as amplifiers, down-converters, and antennas for Direct Broadcast Satellite, (DBS) and Direct to Home (DTH) transmissions as well as products for C and Ku band applications. The wireless unit engages the multichannel multipoint distribution service (MMDS), and MMDS-based wireless cable industry and broadband encryption technology industry. Lastly, the voice and data unit offers telecommunications services like voice and networking. Micropulse is a subsidiary of CAMP that designs and manufactures components for use in Global Positioning System (GPS) technologies.
MMDS is Important
By some estimates, MMDS grew from a $50 million dollar market to a $250 million dollar market in 1999. Investments by phone giants Sprint (FON) and MCI WorldCom (WCOM) to the tune of some $1 billion in the MMDS Industry last year could possibly tell of even stronger growth projections in the technology. MMDS is poised as a high speed alternative to DSL and ISDN services and the technology is wireless to boot - a feature of the technology that poises it as a contender for the top choice of the high speed data market. It is speculated that FON and WCOM control enough of the MMDS spectrum through their aggressive acquisitions this summer to serve 50 million homes. The technology circumvents the problem of bandwidth in metropolitan and LAN environments. As space on copper gets more crowded and providers of data and voice services get their margins squeezed even tighter, advancements in integrated circuitry technology has brought a new generation of remote access devices that are so varied and capable that for now they must be amorphously categorized as wireless handheld devices. MMDS serendipitously merges the potential of high-speed access with an inexpensive wireless technology. Just as advancements in optics and displays, integrated circuits and power storage as well as transmission, reception and storage technologies have come together to enable the third generation of wireless communications, MMDS was approved by the FCC as a two way communications platform and backed by major players in the communications industry. The Internet application of the technology is touted by the catchy title of "Broadband Wireless."
Sales of satellite systems by CAMP increased four-fold last year, as the wireless industry moves forward in establishing a basic wireless application protocol for use in wireless communications, MMDS technology will play a key role in that development. Global Positioning Systems are becoming more prevalent, affordable and therefore marketable as the price of integrated circuits continues to be driven lower. CAMP stands to benefit greatly from the wireless era that is bearing down on us as fast as technology allows it. With the current trend in technology in a shift towards compact-handheld devices with on-demand wireless access to voice and data, CAMP is positioned as an enabling technology company.
Globalstar {GSTRF}
Imagine being able to make a call from anywhere in the world, be it in the middle of the Caribbean or the Australian Outback, for about about a $1.00 a minute. This is the premise that Globalstar Telecommunications Limited {GSTRF} offers. The Bermuda based company is the acting general partner of and holds a 38.4 percent ownership interest in GlobalStar, L.P. ("Globalstar). (Loral Space & Communications Ltd., a limited partnership co-owned by subsidiaries of Lockheed Martin and Qualcomm, is the managing general partner with a 43 percent partner interest). Globalstar is a wireless communications provider that will offer telephone or data transmission service to any location in the world (with the exception of the artic regions and certain areas in the middle of the oceans) when its network is becomes fully operational next year (actual commercial service to paying customers recently began in Canada and Brazil).
What separates Globalstar from the bankrupt Iridium is Globalstar's well thought out business model and superior CDMA technology. Low Earth Orbiting (LEO) satellites offer a distinct advantage in terms of both cost and performance because their lower orbits place them closer together, reducing the number of satellites needed to complete the network. Globalstar's LEOs rely on "smart" telephones - thus eschewing the need for expensive on-board satellite processing.
Although the Globalstar premise fulfills a definite need - there are vast areas throughout the world, including in the United States, that will never be served by any other form of high-speed communications service - the company has just begun to generate revenues and profitability is not expected until later this year, at the earliest. Investing in GSTRF, therefore, involves a high amount of risk; however, it is the opinion of Wall Street City that shareholders will be well compensated for this risk once the system is fully operational and profits begin to be realized.
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