[SmartMoney.Com article: ACTM the 'Most Recommended' stock.]
August 30, 2000
The Most Loved Stocks
By Christopher O'Connor
WOULD YOU BELIEVE that ACT Manufacturing (ACTM) stock
is the most popular stock on Wall Street?
True, shares of this Hudson, Mass.-based electronics
manufacturer aren't the most heavily traded nor the most
widely held. But they are the most highly recommended.
According to Zacks Research, the 10 analysts who follow
the stock all rate it a Strong Buy. That's a lot of praise
for a relatively obscure small-cap stock.
Now, analysts' recommendations may not always be right,
but they can boost a stock's price. With 10 backers
churning out optimistic forecasts for ACT (the acronym
stands for Advanced Cable Technologies), we may be
hearing more about this stock.
So in this week's stock screen, we looked in all sectors
for analysts' favorites. In Zacks database of 6,460 stocks,
382 are unanimously rated Strong Buys. (Zacks uses a scale
of one to five — one being a Strong Buy, five being a
Strong Sell.) But "unanimous" doesn't mean much when there's
only one vote. To eliminate the stocks with thin coverage,
we threw out those followed by fewer than four brokerages.
That left us with a pool of 28 popular stocks.
But just as lavish praise can swell a head, so too can it
inflate a stock price. So we added another filter to our
screen. We decided to throw out any stock valued above its
industry average, based on its price-to-earnings ratio.
That meant that dearly valued analysts' darlings — like
business software developer Informatica (INFA) (which has
a P/E of 453.3) and broadband-media chip maker Pixelworks
(PXLW) (which has a P/E of 220.4) — were chucked aside.
Ten stocks with high ratings and modest valuations ended
up on our list. But since valuation alone doesn't make a
top pick, we fished around for other reasons these stocks
deserve the high praise.
Which brings us back to ACT Manufacturing, the stock most
praised by Wall Street. "ACT is certainly lining up their
chips in the right areas," says Herve Francois of Credit
Suisse First Boston, who reinstated his Strong Buy rating
on Aug. 17, after ACT's acquisition of GSS Array Technology.
"We believe it represents a high-growth backdoor technology
investment opportunity trading at significant discounts to
its better know EMS [electronics manufacturing service] peers,"
wrote Michael Schneider of Robert Baird, who joined the
Strong-Buy brigade when he initiated coverage of the stock
on Aug. 22. With 10 brokerages now following it — two added
just this summer — the stock's profile is climbing.
But it's still in the shadows of its peers. In the world of
EMS, Solectron (SLR), SCI Systems (SCI) and Flextronics
International (FLEX) have far bigger businesses than does
ACT. In fact, Solectron brought in 12 times as much revenue
as ACT last year.
It may be small, but analysts are quick to point out that
ACT's revenues grew 60% last year. ACT has carved out a
specialized niche by selling its manufacturing services to
telecom companies. "Traditionally, telecom companies always
felt manufacturing was a service they wanted to keep close
to the vest," Credit Suisse First Boston's Francois says.
The analyst points out while 70% to 80% of the major
computer-hardware companies hire outside electronics
manufacturers, only 5% to 10% of the telecom companies
do. So larger EMS players veered away from telecom to the
larger tech markets. Meanwhile, ACT makes more than 80% of
its money in the telecom business, manufacturing such things
as printed circuit boards for customers like Nortel Networks
(NT) and Efficient Networks (EFNT). And these clients'
manufacturing needs have grown over the years.
To further boost its growth, the U.S.-focused ACT plans to
expand into European and Asian markets. To this end, the
company bought Thailand's GSS Array and France's Bull
Electronics Angers in the past year.
Analysts also like to point out that ACT isn't trading like
a tech or a growth stock. With a market cap of just $800 million,
it is currently valued at 19 times next year's earning's estimates.
By contrast, the $27 billion Solectron is valued at 40 times next
year's earnings.
Why is ACT so cheap? One reason may be a near-disastrous fourth
quarter back in 1997, when ACT experienced a sharp drop-off in
sales and announced it would take a $13 million inventory-related
charge. The trouble continued into 1998. A class-action lawsuit
filed in February 1998 was finally dismissed on May 25 of this
year. Since that day, the stock is up more than 100% to its
Wednesday closing price of $47.44. Analysts think it has more
room to run.
ACT isn't the only company that turned up in our screen of best-loved
stocks. Analysts also think home-shopping network ValueVision
International (VVTV) has a growth story. The six brokerages that
rate it a Strong Buy are trying to tell clients that tale.
Despite the brokerage backing, ValueVision is down 50% so far this
year. For one thing, it lurks in the shadow of home-shopping king
QVC. But while ValueVision doesn't hawk nearly as many diamoniques
as QVC, it's doing its best to catch up. Powerful investors like
GE's (General Electric's) NBC and Polo Ralph Lauren (RL) are helping
raise its profile.
But the company faced a major setback in June, when a deal with NBC
Internet's (NBCI) Snap.com fell through. ValueVision had planned to
rename its network SnapTV, joining marketing forces with portal
Snap.com. But NBC, which owns more than a third of ValueVision's
stock, announced it would shut down the portal as part of a
reorganization this fall. That left ValueVision looking for a new
marketing partner.
Meanwhile, ValueVision is building its audience base, which should
help find one. In May, it struck a deal with Time Warner Cable to
reach three million new cable subscribers this fiscal year and
another million in each of the next two. And it is currently
negotiating a similar deal with Comcast (CMCSK) to reach two
million more homes. More cable viewers means more potential
home-shoppers and more eyeballs (to borrow the Internet's charming
term) to sell to advertisers.
Morgan Stanley Dean Witter analyst Richard Bilotti writes in a recent
research note that "the increased profile of ValueVision's programming
as well as its continued growth in cable and satellite distribution
will attract more traditional retailing partners." This should help
it recover from its dot-com disappointments and ramp up revenues nicely,
the analyst thinks. Morgan Stanley has a 12-month price target of $40
on the $26 stock.
And with analysts trumpeting ValueVision, the stock may get its momentum
back. But if you get the feeling analysts tend to tell investors to buy
more than they tell investors to sell, you're right. While we found 382
stocks that are unanimously rated Strong Buys in our Zacks database,
only five are unanimously rated Strong Sells. As influential as analysts
may be, they could probably be even more so if they'd only yell "sell" a
little more often.
Source:
smartmoney.com |
