MICROCAP INVESTOR 2000 FBCE UPDATE:
I just got the second issue. There is a lot of good stuff here that I think the thread can use to help make better investments:
MICROCAP INVESTOR 2000
February 21, 2000
9:00 AM
Table of Contents:
I. Questions and Answers:
II. Review of First Pick: FIBERCORE (FBCE)
III. Market Analysis: Friends and Backers
IV. Our Second Pick: AM Communications (AMCM)
I. Questions and Answers:
Welcome to the second issue of Microcap Investor. It certainly has been a busy week and we wish you all a happy president?s day. Since our first issue went out we have received many questions, and thought it best to answer some of these before continuing with our market analysis and new picks. Here are some of the more common requests for information we have received:
How are you any different from other ?stock picking? services?
This is our favorite question because it cuts right to the core of why we are putting out this newsletter in the first place. Over the past several years, we have become discouraged with the number of ?hot pick? services who set up websites, newsletters and the like. Whereas sometimes the companies that are chosen by these ?services? do make excellent investments, that is often not the case. Frequently, too little due dilligence is performed and the stockpickers load up on what is no more than a contrived momentum play, often leaving their readers owning shares of highly undesireable companies long after the leader of the newsletter has moved on to the next play. As an example, just this week, several ?guru?s? picked Fiberchem (FOCS), in an obvious attempt to capitalize on the current mania for fiberoptic companies. But the sad fact is that Fiberchem is not a fiberoptic company. They develop, produce, market and license a fiber optic chemical sensor technology which detects and monitors hydrocarbon pollution in the air, water and soil? not exactly the type of investment that one could in good conscience recommend. Of course the price has risen, but that is immaterial, because MANY people will be left holding the bag on what we consider to be a lousy long term investment.
Sickened by this increasing trend, we decided not to create a stock picking service, but rather a newsletter. Our intent is to empower our readers with analysis of market trends and with stock recommendations that we ourselves are proud to own. Remember, whereas buying stocks can be fun, it is an investment. You should be very discriminating as to what you buy with your money. In fact, it is our hope that through this analysis, readers will soon be able to spot trends themselves and pick their own ?winners?.
This newsletter is about saying no to hype and garbage and yes to analysis and careful thought. You will never see us mention percent gains on the winners while seemingly forgetting about the ones that have not performed up to expectations. (As an aside, we get a kick out of other sites who list massive percent gains on past picks when they know full well you could never have bought in at their recommended price and sold at the very top!) We will attempt to release our newsletters before the market opens, giving every one an equal chance to digest the information and do their own analysis?you should always investigate to the best of you ability that which you are buying. We are not interested in who has the fastest internet connection so that the next wonder pick can be purchased as soon as it is released, without even knowing what you have just bought. In fact, it is our hope that none of our picks ?spike? the first market day after our reports and that everyone has equal access to a particular stock at or below our recommended price. However, a second very important goal is to pick companies that will reward even those shareholders who have the temporary misfortune of buying at the high price on the day of their purchase. Our goal is to allow you to capture the very few excellent, undervalued companies on the otc:bb and Nasdaq who will reward you not only for a day or week, but through all of 2000.
Finally, we do not constantly barrage readers with multiple emails with several picks a week, press releases and constant updates. If you choose to own shares in any of our recommended companies, we are fairly certain that you will follow the company yourself. One newsletter a week is just about all we can handle, and we are sure that it is enough for you as well. We will, however, update our previous picks during our weekly newsletters.
What criteria does a stock have to meet for you to recommend it?
There are many. All of our picks MUST be fully reporting companies to the SEC. With many unscrupulous companies out there, we would never take a chance on an unreporting company and you shouldn?t either. In terms of additional criteria, there are several trends we look for to find winners. We often ask ourselves many questions, such as is the company involved in a ?hot field?? Do their products appear to be increasing in demand in the marketplace? More importantly, are revenues increasing? Is the company?s loss decreasing, or gain increasing? What partnerships does the company have? Plans for growth? Plans for listing on national markets? Is volume increasing? Stock price increasing? Is the company undervalued compared with peers? Do we believe that the stock price will appreciate greatly from its current position? We look for hard evidence that the company not only has products that are in demand, but is also able to capitalize on this demand with improved quarterly results. Simply a ?good story? can make for an awful investment. You want to be able to defend against any naysayers with hard proof that the company YOU OWN PART OF is growing and is a good investment. When a stock meets our stringent criteria and it is recommended you can rest assured that it is a solid company who appears to be on the cusp of explosive growth. If the stock happens to go down after you buy it, you can rest assured that the company you own has many compelling reasons why it should go up throughout year 2000. It is our goal that all picks will appreciate at least 200% throughout 2000, with many having higher targets than that.
Do you have a website/mailing list?
We are hard at work at developing our site and mailing list and have contracted with onramp productions to host our site. We will update the progress of this project in future newsletters.
Do companies pay you to present them in your newletter?
NEVER. We never accept any form of payment, stock or other article of value from any company featured here. Again we are not a hype service, rather very picky INVESTORS.
Do you own the companies you present here?
In most cases, yes. We are proud to own the securities we mention here because we truly believe them to be excellent investments for year 2000. We do report the good and the bad (of course if there is that much bad, it wouldn?t be a pick in the first place), and strongly urge all readers to do their own due diligence on every security we recommend. We do reserve the right to buy and sell these securities as market conditions dictate. With the questions out of the way, it?s time to take a look back on our first pick from our premiere issue, FIBERCORE.
II. Review of First Pick: FIBERCORE (FBCE)
Fibercore was recommended on February 14, 2000 at 3 13/16 and was readily accessible at this price for two trading days. On Wednesday February 16, 2000 the company announced a 100% increase in contract sales within the United States. The market?s response to this news was overwhelming, as suddenly individual investors and institutions ?discovered? Fibercore. Over the rest of the week, Fibercore traded as high as 9 ¬ before settling on Friday at 8 9/16, 126% above our recommended price. These events are not surprising to us at all. As mentioned in our past issue, there are few hotter sectors in the market than internet infrastructure, in particular fiberoptics. As a pure play in fiberoptics, Fibercore is uniquely situated to take advantage of the burgeoning demand for their products. The latest contract is simply another example of how the company is executing a sound business plan, and we expect their sales to continue to increase, as key personel are currently on an extended business trip outside the United States. We regret one error that was posted in the newsletter, however, as the line that read ?For the past several years, fibercore has posted a clear increasing trend in sales in the United States:? should have read ?sales in U.S. dollars?, and has already been corrected in our first issue. Fibercore?s entry into the United States market is fairly recent, as the company had to wait for certain Corning patents to expire.
Given that the share price is rapidly approaching our six month target of 14 « in one week, where does the price go from here? We maintain that Fibercore?s shares remain undervalued, but are catching up. Last issue, we suggested that Fibercore ought to trade at roughly 30% of Optical Cable Corporation?s market cap. This week OCCF?s cap swelled to 2.1 billion as the market?s demand for recently discovered infrastructure companies continues to rise. This would justify a market cap for Fibercore of roughly 630 million, or a stock price of roughly 17 dollars/share, which we believe is in reach.
There are several current trends that we feel will continue to propel Fibercore in the short term. First, investors are hungry for the next great undiscovered internet stock. As enthusiasm for the current highfliers and traditional e-commerce companies wane, you can bet that that money will be headed into a new group of recently discovered companies who are poised to be the next group of highly sought after securities. It is no coincidence that on Friday, a day when the markets were decidedly down, Fibercore and other small cap technology issues continued to make impressive gains. Second, now that the stock sits above the five dollar range, it is accessible to a whole range of institutional investors who often are restricted from purchasing shares in companies who trade below this level. In fact, it appears that Fibercore has excellent institutional support, accounting for roughly 30% of the shares traded on Friday as reported by the Thompson network. Third, now that Fibercore?s shares trade above the four dollar mark, the clock is ticking on the 30 day requirement before the company can apply for listing on the Nasdaq exchange. Finally, the Optical Fiber Communication Conference and Exhibit 2000, scheduled to begin March 5th in Baltimore, should continue to focus investor?s attention on this exceedingly hot area. We continue to be exceedingly bullish on Fibercore and expect great things not only this week, but also throughout 2000. And now, having taken a look back on our first pick, let?s move ahead to new ground.
III. Market Analysis: Friends and Backers:
Last week, we introduced a key theme toward picking internet winners, the Picks and Shovels theory. To reiterate, the theory tells us that those companies who stand to win no matter who survives long term in the internet industry will be the true winners. If you haven?t read about this theory, we highly recommend taking a look back at our first issue. Fibercore is a perfect example of a picks and shovels company, because whether you choose broadband access from company A, B, or C, each of these will rely heavily on Fibercore?s fiberoptic and preform components to build their information superhighways. This week, we introduce another winning theory, and see how we can use it, as well as the picks and shovels theory, to find our next winner.
The second theory coined ?friends and backers? tells us that when smaller businesses involved in exciting new technology are able to form partnerships with very well known companies, their chance for success and recognition is greatly improved. For instance, if you heard of a small company who had partnered with Intel to help develop new technology, your interest in owning shares of the small company is markedly greater than if they had no partnership at all. Why? The reasons are quite simple. As investors, we want to know that our money is being well spent. When a company teams up with a very well respected name, it gives an immediate sense of legitimacy to the smaller company. It is a vote confidence for management and instills a sense that ?well if Intel is willing to invest/partner with company X, then the product must be good?. In addition, these well known partners may provide a source of capital and immediately gain exposure for their smaller business partners, making it much more likely that Wall St will take notice. Having looked at these two key themes, let?s find our next winner.
As more and more internet, cable and phone companies come to rely on high speed access to informatioin via fiberoptic broadband networks, one key issue will always be reliability. Seemingly every other day, we read about web sites that were immobilized by infrastructure problems or hackers, as well as viruses that bog down networks. As consumers, we are often frustrated by this poor service, and many choose to take their business elsewhere when adequate performance is lacking. It is imperative, therefore, that companies who provide these services have an ability to constantly monitor the performance of their networks and have a mechanism in place so that they are alerted to any difficulties at the earliest sign of possible trouble. In this manner, loss of service to customers and poor network performance can be avoided, or down time markedly reduced. Companies who can provide these early warning detection systems are sure to be winners as the number of fiberoptic networks continues to expand at a remarkable pace.
IV. Our Second Pick: AM Communications (AMCM)
IMPORTANT NOTE:
As we go to print this issue, we have learned that at least one ?stock picking? service has listed AMCM as a pick for this week. This is somewhat unfortunate, as it will immediately bring a daytrading element that we did not anticipate affecting the stock this week. We remain steadfast in recommending AMCM and stand by EVERYTHING that is printed below, we just wish to caution those readers who may not have experience buying ?hyped? companies that large price swings might be expected on Tuesday, often with large runups and violent pullbacks. For those considering AMCM as a long term investment, please DO NOT buy in at the highs tomorrow. In almost every case, a stock can be purchased a day or two later at a cheaper price and we would hate to see our readers taken advantage of. With that said, on to the report:
Based in Quakertown, Pennsylvania, AM Communications is a fully reporting company founded in 1974. For the past decade, AM has been a pioneer in developing network monitoring systems for broadband communications networks. AM has applied its technical strengths in RF communications, microprocessor controlled circuits and application software to produce a proprietary system that allows CATV operators and broadband access providers to monitor the performance and operation of the complete broadband transmission network, thereby enhancing network reliability and optimizing performance. The Company's OmniStat System is an advanced status monitoring system for broadband networks. The OmniStat System represents the second generation of monitoring technology built on AM's legacy technical monitoring system platform. OmniStat is a total integrated system comprised of hardware and software products designed to address the evolving need for standards based network management architectures.
Thus AM Communications is a perfect picks and shovels company because they make the very products that broadband providers will come to rely on to insure that their networks are functioning properly. In fact, the company reiterated the importance and demand for their products, stating: ?The Company's products are experiencing a significant increase in demand as cable operators and now the major telco's recognize the opportunity to expand and provide additional video, telephony, and data services. These services will be provided over a significantly improved "Information Highway" consisting of broadband distribution systems. These systems are being built today and include sophisticated two way communication systems enabling such new services as Video on Demand, Telephone over Cable, Internet Access and others. AM's monitoring products provide intelligence to these distribution systems enabling the operator to keep the system in control and improve reliability, something we call providing "Guardrails for the Information Superhighway." And the building demand is starting to show on the bottom line.
Increasing Revenue:
Revenues for the third quarter of fiscal 2000 were $2.7 million, up 27% compared to $2.1 million reported for the third quarter of fiscal 1999.
Decreasing Losses:
The Company reported a net loss of $401,000 during the recent quarter, compared to a net loss of $689,000 in the comparable period in fiscal 1999.
Improved Outlook:
Commenting on the results, Keith D. Schneck, President said, ``We continue to see improved operating results with the introduction of new products, expanded selling efforts, and the addition of new OEM partners. Our selling activities for the third quarter reflected a dramatic increase in bookings as backlog expanded to $3.9 million, up 86% over the backlog reported just three months ago. Our operating results for the recent third quarter reflected a loss of $401,000 which included an inventory charge of $450,000 booked during the quarter as the Company prepared to transition to a complete outsource manufacturing strategy beginning January, 2000. Excluding this charge, the results for the third quarter would have been an operating profit.?
Key Plans to improve profitability:
``Effective January 1, 2000 we began our next phase of transformation into a technology systems provider. We entered into an outsourcing arrangement with a NeST related company, that provides complete turn-key outsourcing services for electronic products. Nestronics is owned and controlled by the Company's Chairman, Mr. Javad K. Hassan. Under the terms of the arrangement, the Company's manufacturing staff and inventory were transferred to Nestronics. In return, the Company received a commitment from Nestronics to manage and supply all the Company's manufacturing requirements for a three year period under an agreed upon pricing formula. The amount of inventory transferred will be credited against the value of such purchases made by the Company. We believe that this outsourcing strategy will result in more efficient costing of the Company's products and relieve its operation from the risk of incurring manufacturing inefficiencies which have impacted results in the past,' commented Mr. Schneck.
Capturing world markets:
In December, the company announced an OEM agreement with BARCO, a major European provider of head-end, hub and network management systems. The agreement calls for BARCO to embed key components of AM's OmniStat(TM) Network Management solution into its ROSA network management system.
Key Partners/Customers:
Several of the most respected suppliers of broadband communications equipment have incorporated the Company's status monitoring products under their own private label; such as AT&T, General Instrument, Augat Communications, Philips and Hewlett-Packard and Lucent. In fact, the company?s AM OmniVU software provides standard interfaces to other systems through relationships established with industry leaders such as Hewlett-Packard, Arrowsmith, OSI, and others. The Company sells directly to cable operators and telco's including Cablevision, Comcast, TCI, Time Warner, GTE, Sprint, Pacific Bell, and others. Additionally, the Company has OEM sales relationships with the major equipment providers and integrators including AT&T, General Instrument, ADC, Philips, and others. The Company also sells internationally through its OEM partners and sales representatives in the Pacific Rim and Europe. Thus AM communication?s products have been indorsed by some of the most prestigious leading names in the cable, phone and internet industry. In fact, John Koval, Vice President of marketing of General Instrument repeated this message, stating: GI's decision to go with AM was based upon several critical factors: first, AM's open product architecture encourages active participation by the HFC equipment manufacturers and third party software vendors. Second, the telecommunications industry is rapidly becoming a multi-vendor environment where network equipment must be managed as part of a single, cost effective solution. AM's practice of cooperative engineering is an essential ingredient in making this a reality. Third, by devising a direct-connect solution with AM that obviates the need for proxy agents and additional computing hardware, management of Omnistar becomes practical and affordable,' continued Koval. Thus, AM communications is also capitalizing on the ?friends and backers theory? as well.
The market is beginning to take notice:
The chart below illustrates the fact that there wasn?t much interest in AM Communications until late January, with the shares resting around .40. In fact, the 52 week low is .16. The stock closed on February 18, 2000 at 1.35, with a 52 week high of 1.80, set on February 18, 2000:
As you can see, volume is steadily increasing, and the stock price has enjoyed a nice run recently, culminating with a large rise on Friday, on no news. Given this recent rise, one might be tempted to wait for a pullback before buying. We think that would be a mistake and see much greater gains ahead for this issue throughout 2000.
Still Markedly Undervalued:
There are several companies involved in the same industry as AM Communications, but none trades so cheaply. As a comparison, Digital Lightwave Inc (DIGL)., a company who designs, develops, markets and supports diagnostic products that monitor, maintain and manage fiber optic-based networks sports a hefty market cap of 1.63 billion, whereas AMCM trades at a cap of only 43.5 million. To match DIGL?s cap, AMCM would need to trade at roughly 50 « dollars per share. Of course we don?t think that this valuation is reasonable. DIGL has much greater revenue and turned a profit over the last nine months. However, we feel that it is reasonable to award AMCM a market cap of roughly 20% that DIGL enjoys, thus justifying a share price of roughly 10 dollars per share in the next six months, or roughly 650% above its closing price of 1.35 on Friday February 18, 2000.
Final Analysis:
AM Communications is a growing company in a very hot field. They are a classic ?picks and shovels? as well as ?friends and backers? company who is poised to capitalize on the rapid growth that is expected to propel their industry to new heights in the year 2000. We repeat our price target of 10/ share within the next six months.
Company Information:
Website:
amcomm.com
(Of note is that the company is completely re-designing their site and should have a new one up soon)
100 Commerce Blvd.
Quakertown, PA 18951
Phone: (215) 538-8700
Fax: (215) 538-8779
Email: sales@amcomm.com
Employees as of 4/99: 50
Company Officers:
Keith D. Schneck, CEO/Pres./CFO
Javad K. Hassan, Chmn
Joseph D. Rocci, VP
Michael L. Quelly, VP
Harry J. Tankin, VP.
Market Capitalization $43.5M
Shares Outstanding 32.3M
Float 11.0M
Symbol:AMCM
Price: 1.35 (As of February 18, 2000)
Target: 10
About Microcap Investor 2000:
Our goal is to seek out those securities on Nasdaq, Nasdaq small cap, and otc:bb that show incredible potential to take advantage of the internet revolution. The areas we concentrate in are infrastructure (broadband, wireless, etc) and ecommerce. We only feature securities that we feel have tremendous short and long term potential. We have received no compensation of any kind from any of the companies featured in the news letters, but often do hold positions in these securities. We reserve the right to buy and sell these securites as we see fit and as market conditions change. We urge all readers to do their own due dilligence before considering purchase of any security mentioned herein. |
