I like the mention of BOUT in this one.....
thanks to KLP from GNET thread
SmartMoney.com: Stock Screen - March 09, 2000
CASH-RICH IN A BEAR MARKET
CASH COWS
LIKE HEMLINES, Internet fashion changes season-to-season and year-to-year.
Business-to-consumer Internet merchants like Value America (VUSA1) and Beyond.com (BYND2) were quite trendy ? until late last year, that is, when investors started to realize that retail can sorta, well, stink. Then business-to-business marketplaces and Linux consultancies burned up the joint. Lately the word "Vortal" has been bandied about with painful nonchalance; we're still not sure if that's a Web business or a lower gastrointestinal tract infection. We're doing our best to get to the bottom of it.
But like blue jeans in the fashion world, there's one business staple that never goes out of style. It's called not going bankrupt.
In today's screen3, we repeat an exercise4 we performed last August in which we looked for Internet companies that had enough cash and marketable securities on hand to survive if the market turned south. The idea: these are the companies with the readies to keep investing and growing without going back to investors for a cash infusion ? a tough proposition in a dicey market.
And with recent action ? yesterday, the Dow Jones Industrial Average fell 3.7%, the Dow Jones Internet index fell 2.6% and the Nasdaq slipped 1.2% ? we figured there couldn't be a better time to ferret out these cash-rich performers.
Up until now, it's been fairly easy for Internet companies to raise cash; all they had to do was turn to the equity markets. After all, Web companies were expected to lose money "for the foreseeable future." But as time moves forward and the market matures, this will likely change. Initial public offerings (IPOs) will not always pop 100% on their first day of trading and investors may grow more discerning of Web fundamentals. As Matt Rubins, principal of M/C Venture Partners, a Boston venture-capital firm, said in August, "It's an open question whether or not these guys can continue to hit the food bar."
When we caught up with Rubins Tuesday, he said he'd seen companies in the sectors in which he invests ? communications and Internet infrastructure ? forced to seek more "expensive" capital from venture-capital and buyout firms like Hicks, Muse, Tate & Furst5.
Problem is, these offers require a company to give up a percentage of equity (and therefore control) along with an occasional seat on the board of directors.
And raising money in the stock market? Well, from Rubins' perch, a company's ability to successfully issue more stock has everything to do with what's popular at any given time. Right now, that's business-to-business e-commerce, not the business-to-consumer plays that investors loved last year. "Some of these B2C [business-to-consumer] companies would have a hard time getting arrested," Rubins says.
And even if a company can belly back up to the equity buffet, there's always the painful effect that additional shares have on a stock's performance. A 1997 study from Prudential Securities found companies that added 1% or more to their outstanding shares underperformed peers that added or subtracted less than 1% by about 1% annually (say that three times fast). And the contrast with those that reduced their outstanding shares by more than 1% (through share buybacks and the like) was even greater. Depending on market capitalization, those that added more than 1% to outstanding shares underperformed the big share reducers by an average of 4.7% to 5.1% annually.
Whichever way you look at it, raising money can be a corporate pain in the butt; either a company has to give up a significant ownership stake, or accept dilution of its shares.
To avoid those troubles, and other Web-based ailments, we search here for companies that won't need to raise money ? at least for a while.
We modified the screen this time to concentrate more on the metrics people use in the Internet world. Most important, instead of searching for companies with higher than 50% annual earnings-per-share expectations over the next five years (which is hard to use for companies without earnings), we instead looked at those with sequential revenue growth of 25% quarter-over-quarter for the last four quarters. And, of course, we looked for companies that had enough money to cover expected losses for four quarters.
From the 17 companies our recipe6 turned up, it looks like the least glamorous Internet stocks are in the best position to weather an equity-market storm. Thirteen of them were either consultants or software companies. Only three were portal/search engines (Goto.com (GOTO7), About.com (BOUT8) and Go2Net (GNET9)). And one was on the front lines of e-commerce (B2B chemical seller Ventro (VNTR10)).
Among the software and services firms, it seems the software firms are the most evolved in terms of profitability. Of the five companies profitable now (WebTrends (WEBT11) and F5 Networks (FFIV12)) or expected to turn profitable this year (Vignette (VIGN13), Critical Path (CPTH14) and Inktomi (INKT15)), only Critical Path is in Zacks Investment Research's Internet Services sector.
Both WebTrends and F5 Networks are decidedly less sexy than stable. WebTrends' software ? as its name suggests ? helps companies follow trends in a site's traffic and usage. F5's software aims to improve the performance of a company's Web site by managing traffic so that a user's request is routed to the most available server.
Boring? Yes. But profitable. According to Dain Rauscher Wessels analyst (and Wall Street Journal All-Star) Stephen Sigmond, WebTrends' recently announced16 partnership with Hyperion Solutions (HYSL17) (a company that sells software that analyzes data of the type that WebTrends gathers) means that WebTrends, "is continuing its successful march up the e-business intelligence-value chain." That sounds like a good thing. Both Hyperion and WebTrends will aim to help "multi-channel" (i.e. on- and off-line) businesses analyze and retain customers.
On Tuesday, Sigmond upped his price target for WebTrends from $75 to $125 because at its current trading level of $67 (near its 52-week high), he believes it's "undervalued." At the end of last year, the company had $78.2 billion in cash and securities. Not a bad cushion should the market take a tumble.
For F5, the picture is similarly rosy. In a recent note, McDonald Investments analyst Peter Rubicam wrote that, "Our checks indicate that business in the current quarter, after seeing the normal seasonal slowness in early January, has picked up nicely," and that the company is, "on track to deliver another strong quarterly performance."
According to Rubicam, the stock, which trades at about 20 times his calendar-2000 revenue estimate of $100 million, is at a "significant discount" to its peers, which trade at about 40 times 2000 revenues. Partly for this reason, he has a $150 price target on F5, which currently trades at around $110. As of the end of 1999, F5 held about $60 million in cash and marketable securities on hand, not to mention actual profits of $4.2 million last quarter.
But as with any investment, investors should still be careful: Dain Rauscher Wessels analyst Thomas Erickson estimates that Exodus Communications (EXDS18) ? a Web hosting company that hosts this site, among others ? accounts for 20% to 25% of F5's total revenues. Having such a large chunk of revenue coming from one source is always worrisome.
Still, these two companies are reasonably valued (compared to their peers in the Internet world) and profitable. In addition, they've had four consecutive quarters of solid growth ? a long track record by Web standards. As for the three companies expected to turn profitable this year ? they aren't far behind.
Who knows, maybe Web companies that post profits and don't return to the equity bar for seconds will come into fashion someday. If they do, that would make at least five of the stocks from this screen "fashion-forward," with the rest moving in the right direction. And you know how investors love to be on the cutting edge of fashion.
-- By Ian Mount19
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1http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=VUSA
2http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=BYND
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5http://www.hoovers.com/capsules/40216.html
6http://www.smartmoney.com/smt/screen/?story=20000308recipe
7http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=GOTO
8http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=BOUT
9http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=GNET
10http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=VNTR
11http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=WEBT
12http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=FFIV
13http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=VIGN
14http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=CPTH
15http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=INKT
16http://www.webtrends.com/news/releases/release.asp?id=153
17http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=HYSL
18http://www.smartmoney.com/si/tools/eqsnaps/charts.cfm?symbol=EXDS
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GNET: GO2NET INC(NASDAQ) Thursday, Mar 9, 2000 2:34 AM EST
Symbol Last Trade
Change
High
Low
Volume
GNET
3:58 PM
86
- 5/8
-0.72%
88
83
409,800
Prev Close Open Bid Ask Last Tick Avg Volume 52-week range
86 5/8 87 5/8 80 1/8 86 Up 680,100 27 - 111 3/4
More Info: Charts | Real-Time Quote | News | Financials | Discussion | EPS Est. | Profile | SEC | Hist.Prices | Industry_Grps. | Broker Research | DSP/DRIP |
