"Halftime report"--Multex/MarketGuide:>>>Predictive madness
by Peter Nelson
June 29, 2000
Prediction is very difficult, especially about the future.
--Niels Bohr
The Motley Fool's Tom Gardner made a now-famous comment late in 1999: "90 percent of Internet stocks are overvalued, and 10 percent are dramatically undervalued." As with most forward looking and contrarian statements, Gardner's remark was received with a combination of skepticism and fear.
When the market toppled in the first half of 2000, driven by technology (especially Internet) stocks, however, Gardner was hailed as a near-visionary. Following Gardner's lead, and using last spring's crash as a launching pad, Merrill Lynch's Henry Blodget has placed his bet for the second half of 2000. And he's betting against Internet and electronic-commerce stocks for the short term.
In a brief synopsis of Merrill Lynch's 330-page outlook for the consumer Internet industry, Blodget says "the most sensible Internet investment strategy for the majority of investors is indirect: own the stocks of established companies positioned to benefit from the Internet." In other words, the good Internet companies are here to stay, but the time for investing in unprofitable, high-risk Internet companies has come and gone. Although the crash in March and April helped to reduce the gap between companies' true value and their market value, most remain overvalued. Particularly those companies that continue to operate at a loss, and aren't market leaders.
This fall, and the next five years, will bring the demise of many of the smaller, cash-burning companies, according to Blodget.
"Consumer Internet is a brutally competitive, winner-take-most business. Of 300 public B2C [business-to-consumer] companies, only five are profitable [1.7 percent]. We expect that in three years maybe 15 [to] 20 will be profitable? Of $2.9 billion in 2000E [estimated 2000] industry operating profit, more than 80 percent will come from 3 companies," he says.
His claim, in a truly Darwinian progression, is that only the strong will survive. Blodget names a few core holdings, for the long-term investor, including: America Online (AOL), Yahoo! (YHOO), Amazon.com (AMZN), eBay (EBAY), DoubleClick (DCLK), Priceline.com (PCLN), Homesite.com (HOMS), CMGi (CMGI), Inktomi (INKT), and Infospace.com (INSP).
So, you might ask, if investing in the Internet is out of the question, where should I put my money?
Stocks to watch in the third and fourth quarters
Running a stock screen of all companies in Multex Investor's database, I found 22 companies with more than eight "strong buy" recommendations, fewer than two "buys", and no "holds," "under-performs," or "sells," as of June 23. That means more analysts have high expectations for these companies than for any others.
Ticker
Name
Strong Buy
Buy
PEP
PepsiCo Inc.
14
2
TFSM
24/7 Media Inc.
13
2
NTAP
Network Appliances Inc.
13
2
TYC
Tyco Int'l Corp.
13
2
ZLC
Zale Corp.
12
2
ACAS
American Capital Strat.
10
1
MTZ
MasTec Inc.
10
0
MUSE
Micromuse Inc.
10
2
STM
STMicroelectronics N.V.
10
2
AFM
AMFM Inc.
9
2
ADRX
Andrx Corp.
9
1
DTPI
Diamond Tech. Partners
9
2
MCLD
McLeodUSA Inc.
9
0
RFMD
RF Micro Devices Inc.
9
1
SSTI
Silicon Storage Tech.
9
0
ALGX
Allegiance Telecom Inc.
8
2
BSYS
The Bisys Group Inc.
8
2
KMP
Kinder Morgan Energy Ptnr.
8
2
KARE
Koala Corp.
8
1
MACR
Macromedia Inc.
8
2
NCOG
NCO Group Inc.
8
1
USFC
USFreightways Corp.
8
2
The company with the most "strong buy" recommendations (14) is a household name ? PepsiCo Inc. (PEP). In an April 27 report, Prudential Securities' George Thompson contributed his "strong buy" to Pepsi's tally. The catalyst for the report was expectation-beating first-quarter earnings, which, at 29 cents per share, topped the consensus estimate by a penny.
The beauty of Pepsi's success, according to Thompson, is the beverage company's consistency; he says, "it has been and should continue to be there." While Pepsi-Cola battles it out with Coca-Cola (KO), PepsiCo's other products, including Tropicana and Frito-Lay International, continue to decimate their competition. Thompson's 12-month price target for PEP is $50 ? approximately $7 5/8, or an 18 percent increase from its current price of 42 3/8 (as of 6/23).
Coming in second, with 13 "strong buy" recommendations, advertising and Internet media leader 24/7 Media (TFSM) appears to defy the odds ? succeeding in spite of its being an Internet company.
In a report from May 25, First Union Securities' Bennet Notman articulated his confidence in the company's cash control: "We believe 24/7's improving cash position provides the company with a level of capital adequate to fund continuing operations, infrastructure investments, as well as strategic initiatives until expected profitability." Addressing the most rampant concern in the Internet sector, and one of Henry Blodget's main sticking points, Notman believes that 24/7 has enough cash to turn in an impressive second half.
Network Appliances Inc. (NTAP) and Tyco International Ltd. (TYC) also enjoy the confidence of Wall Street's finest, with 13 "strong buys" each. Deutsche Banc Alex. Brown, in a report from June 19, rates Tyco a "strong buy," with an $81 12-month price target. This new price objective represents significant upside ? Tyco currently trades in the high-$40 range.
A June 15 report from Prudential Securities rates NTAP a "strong buy," advising investors to buy on the weakness in NTAP's stock price. Prudential's 12-month price target for the data-storage company is $135.50, a tremendous 66 percent increase over its current price in the low-80s.
The list is populated not only by large-cap behemoths. American Capital Strategies (ACAS), a smaller company than most others on the list, garnered 10 "strong buys." In a May 2 report, U.S. Bancorp Piper Jaffray rated ACAS a "strong buy" with a $30 12-month price target. As of June 27, ACAS was trading at $22 3/8.
Tomorrow's major trends
There's obviously more to preparing yourself for the second half than pinpointing a few companies in Wall Street's favor. There are larger economic trends and major moves in the market to keep your eye on.
Deutsche Banc Alex. Brown's R. McFall Lamm, Jr., Ph.D., in a report called "Private Client Panorama," provides a general investment strategy: "The combination of higher interest rates and a sluggish stock market has done little to dampen consumer confidence? This is discouraging news for the equity markets, where the predominant view is that the Federal Reserve is not yet finished with its attempts to slow growth."
Lamm believes that growth will slow as the Fed tightens its grip, and that volatility will continue to dominate the market until the Fed's tightening cycle comes to an end. This he expects to happen sometime after the summer, alongside an anticipated "solid relief rally" to close out the year.
I was taught from early on that the best preparation for the future comes from understanding the past ? from studying history and identifying the patterns. Because, as they say, history repeats itself.
We learned, in Wendy Cholbi's article on the first half of 2000, that to date, most analysts are about 50 percent correct at mid-year on predictions made in January.
We also learned that although no one could predict the terrific tech tumble in late March, pundits like The Fool's Tom Gardner and Merrill Lynch's Henry Blodget help investors apply reasoning necessary in wading through hype and exuberance.
Companies mentioned in this article
America Online (AOL)
Yahoo! (YHOO)
Amazon.com (AMZN)
eBay (EBAY)
DoubleClick (DCLK)
Priceline.com (PCLN)
Homesite.com (HOMS)
CMGi (CMGI)
Inktomi (INKT)
Infospace.com (INSP)
PepsiCo Inc. (PEP)
Coca-Cola (KO)
24/7 Media (TFSM)
Network Appliances Inc. (NTAP)
Tyco International Ltd. (TYC)
American Capital Strategies (ACAS)
Reports mentioned
Henry Blodget's outlook 6/15/00 Merrill Lynch (free)
Report on PepsiCo 4/27/00 Prudential Securities ($25)
Report on 24/7 Media 5/25/00 First Union Securities ($10)
Report on Tyco Int'l. 6/19/00 Deutsche Banc Alex. Brown (free)
Report on Network Appliances 6/15/00 Prudential Securities ($10)
Report on American Capital Strategies 5/2/00 U.S. Bancorp Piper Jaffray ($10)
"Private Client Panorama" 6/14/00 Deutsche Banc Alex. Brown (free)<<<
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