The N.Y.Times got it right a few days ago: "Living through the stock market's gyrations in 2000 was rather like enduring a months-long detention at the school of hard
knocks. At various times, investors found themselves standing at the blackboard writing over and again: I will not buy stocks with no earnings. I will not buy stocks with no
business plan. I will not buy stocks with borrowed money. I will not read Wall Street research." We're all guilty as charged.
Despite widespread markdowns and a burst of last-minute buying, this year's holiday shopping season is shaping up as among the worst in a decade, industry
analysts said. A slew of factors including rising gas prices, a tumbling stock market and a new administration clearly worried about a recession combined to chill customer
appetites for everything from home appliances to sweaters. Shortly after Thanksgiving, retailers responded by cutting prices steeply. But even when they were faced with 50% off
leather jackets at Gap or 10% discounts on everything at Home Depot, consumers showed restraint. "Retailers are going to remember this as a Christmas that took place during
a recession," said Carl Steidtmann, chief retail economist with PricewaterhouseCoopers, who predicted that the season would be followed by "less expansion, more
consolidation and more bankruptcies" among merchants nationwide. The day after Christmas, several of the nation's largest chains, including Wal-Mart, Target, Sears and
Federated, acknowledged that December sales were going to be lower than they had predicted at the beginning of the season. The International Council of Shopping Centers, a
trade group, reported that sales at specialty stores in malls increased only 2.2% - hardly a wipeout, but sharply lower than the 7.7% increase last year, especially after several
years of boom times. The news was disappointing across almost all categories, but merchants selling big- ticket, discretionary items were particularly hard hit. For example,
jewelry sales were down 3.2% from last year, and home entertainment, which included electronics, was down 6.3%, according to the council. Similarly, TeleCheck Services,
which monitors check spending nationwide, said holiday sales rose 3.2%, exactly half last year's gain and among the worst year-over-year increases since 1991. Merrill Lynch
predicted a holiday gain of only 2.4%, which would be the worst since at least 1990. Mirroring the brick-and-mortar world, sales on the Internet were also a disappointment.
Although total online sales grew to $5.83 billion, an increase of 55.4%, according to BizRate.com which gathers consumer information, many Internet merchants had counted on
sales at least doubling.
In order to be seasonally appropriate, what do you say we debunk the so-called "January Barometer"? This simple indicator, which purports to discern the direction of
stocks between February and December, was even the subject of an article in a recent Barron's. Simply put, the January Indicator portends for a good year for stock investors if
the market boasts a positive return in January. But if stocks tank in the first month of the year, that's a signal that the market is heading lower for the rest of the year. Oh, if life were
only this simple! According to the Barron's article, the January Barometer was correct in each of the last six years, and hit pay dirt in 46 of the last 61 years for a respectable
75% success rate. This is obvious an attractive level of accuracy. So what's wrong with the idea? To get a more detailed look at how valuable the January Barometer is, let's
examine the results since 1975. Over the last quarter decade, the barometer has correctly predicted the direction of the market 19 out of 26 times, for a 73% accuracy rate. Even
more impressive is its record over the last six years, as the barometer has been correct in every February through December timeframe since 1995. Unfortunately, things aren't
as they seem.
For starters, let's suppose that one predicts that every rolling 11-month period from 1975 to present will be profitable. That simple guess turns out to be 86.4% accurate, which
makes mincemeat out of the barometer. Further, let's say that we prophesize that every February through December timeframe since 1975 will be profitable. That turns out to be
correct 87.3% of the time, which makes the January Barometer rather useless by comparison. A study shows the real Achilles' heel of the January Barometer: its record of calling
bear markets is less than stellar. In fact, predicted stock declines from February through December (which are supposed to follow January pullbacks) are
only about 52% accurate - same as flipping a coin. What really drives the supposed "accuracy" of the January Barometer is the tendency of stocks to rise over time. Stocks
have risen almost every year since 1975, and over most 11-month holding periods, too. As a result, any analyst who foresees higher stock prices 12 months hence isn't really
"seeing" much. The bottom line: stock gains (or losses) from February to December are totally independent of the market's direction in January.
Our advice to you remains the same: weed out the poorly performing micros and dot.coms, especially if they bounce a bit, and get into beaten down low priced non-internet
techs, especially if they are in infrastructure areas and have predictable cash flow. A sharp, alert investor should be able to make a quick 20% on any meaningful NAS
rally this month, with the right stocks.
The investment landscape has changed in many, many ways over the last 9 months. One of the more important consequences of the bear market of 2000 is that capital has
dried up for all but the most deserving companies at every point in the food chain: "aunts and uncles" seed money, venture capital funding, later round financing,
IPO's and expansion capital for public companies. Many of the shut-downs and bankruptcies that we have seen - and are going to see more of - are not so much a result of poor
business models, rather they are a direct consequence of the impossibility of raising money to get a company to break-even cash flow. Never in recent history have we seen
such a huge number of large, well-funded venture vehicles go from super hot to liquidation in a matter of six months, without even going through the steps of revising their
business plans and spending a few months banging their heads against the wall, before acknowledging defeat. If you remember Bob Fosse's movie All That Jazz, there was
no "anger, denial, bargaining and resignation". The lower echelon dot.coms went from euphoria to death in two easy steps: (1) boom, (2) bust. A new paradigm indeed..
As you look at your portfolio and analyze smaller stocks you might want to own going forward, the #1 consideration has to be liquidity and operating viability. The
leverage and volatility of small-caps and micros is such that every self-respecting portfolio will want to own some, for sure. But which ones? The tools that I find most useful for a
quick analysis are: Yahoo's Finance section finance.yahoo.com, particularly its Profile section, S&P's Company Profiles personalwealth.com, which has a
comprehensive set of navbars with Financials, Earnings Forecasts and News, and Big Charts bigcharts.com, not only for the charts themselves but for the Analysts
Forecasts section. Once I see a story and chart I like, I dig deeper with free research tools such as Zacks, Multex, Bloomberg and so on, though most of those are not useful for
micros. I also use the free research from the brokers, which is also more relevant for NASDAQ stocks than the BB's.
What should you look for? Take the case of Applied Digital (ADSX, 69c), a technology company we wrote about many moons ago, before it fell on hard times and tripped
over its own feet. The stock is listed on Yahoo as having $2.41 in book value, more than three times its current market price. However, if you look at the cash position in the same
Yahoo profile, you will see that this unprofitable company has less than 10c in cash per share. Clearly, the book value of the company has been "pumped up",
Schwarzenegger-like, by the goodwill on its numerous acquisitions over time, giving you an effective book value that is much, much lower. The debt/equity ratio is high for a tech
company, at 0.44. Also, the relentless selling of late in ADSX is a negative endorsement for a directionless company that has been trying to feed its shareholders the flavor du
jour for a while. Not something you'd want to own...
On the positive side of the ledger, a good company whose accounting is not exotic can give you a clearer sense of its real value. Profitable eMergent (EMRT, 1.50), on old
friend of this newsletter, traded down to its book value last week - and a very low PE - and bounced once it became a screaming bargain. They don't cook their books. The
stock, which might show EPS of 25-28c next year, is still dirt cheap. In the chip sector, the stock of Integrated Silicon (ISSI, 14.37) suffered due to softness in the chip group and
got sold way down. Consensus EPS for the current fiscal year (9/01) is $2.10 on Big Charts and $2.45 on Yahoo, the company's book value is $8 and they have $4 in cash. Not
too shabby, for a high-flyer
There are obvious risks involved in determining the viability of a company based on its balance sheet and earnings forecasts. A case in point is another high flyer that fell on
hard times, NetSpeak (NSPK, 1.56). The provider of IP technology had a book value of $2.63 per share in its most recent 10-Q and seemed to be trading just above that, until it
announced very disappointing sales for the current quarter on Friday - and lost half its value in one day. That warning made it necessary to toss next year's earnings estimate of
10c per share right out the window. Now trading at 50% of book, the whole subject of the company's survival is in question. Or look at JAWZ (JAWZ, 47c) a Canadian provider of
security software for ex-commerce. The listed book value is 86c, nearly double its current price, but there is only about 12c a share in cash and the company continues to bleed
red ink. What will come first: bankruptcy or positive cash flow? It's one or the other, eventually, and you may not want to play the odds no matter what they are.
Viador (VIAD, 1.31) whose 52 week high is 65 (now sporting a measly 98% decline from the high!! - but that's a club with many members). Either this company is a "GOOB"
(going out of business) or it is a very interesting play ("VIP"). First, it bears pointing out that their core business - developing enterprise portals for corporate communication - is not
dependent on e-commerce advertising, even though it is a web-related business. In other words, their space will continue to expand even if internet advertising dies. More
relevant, the company has been tripling revenues each of the past two years. Their customers include Fannie Mae, the US Navy, Apigent, URM Stores and St.Gobain. These
companies join the existing customer base of the likes of Boeing, Ch.Schwab, Citibank, Connexant, JP Morgan, Paine Webber, Sprint PCS, Sybase, the US Department of
Education and Xerox - all of which increased business with Viador in the third quarter. So far there is no indication from management of softness in their business, but guilt by
association has driven the stock down anyway, to a buck and change - the institutions don't mess around when they don't want to show a certain industry group in their portfolios.
With 18.3M shares outstanding, the total market cap of this former high flyer is just a shade above $20M now. Looking quickly at the three sites I linked above, you will see some
points of agreement and some discrepancies. All in all, the picture that is provided is that of an attractive stock. As of 9/30, book value is on the order of $1.60 and, more
importantly, there is $1.25 in cash. The debt/equity ratio is 0.10, meaning there is about 15c of debt per share, which is OK too. By taking the handful of earnings forecasts on faith,
VIAD might lose 55c or so next year, before turning profitable. If you are positively disposed towards its management, you will assume that they will find ways to cut their
expenses in the current environment and be able to reduce the loss. After all, what better time to lay off employees guilt-free than when financing dries up, the stock dives and
competitors are laying off too?
Digging a little deeper, you'll find some very upbeat statements in VIAD's Q3 report. Here are some excerpts from the management's statements: "We are very pleased with the
September quarter results, which again exceed the First Call consensus estimates. Viador is winning in the market for Enterprise Information Portals, not only by
providing a leading-edge technology solution, but also by having a customer base of nearly 350 customers and strong revenues.'' They also said "Based on GartnerGroup's
recent research note on portal product vendors, Viador achieved one of the strongest overall positions. Customers, partners and OEMs are increasingly selecting
Viador's portal platform as the next generation Internet enabler for the enterprise. We believe Enterprise Information Portals are moving from a nice-to-have function, to a
must-have infrastructure.''
This is one high flyer that may attract some institutional buying in early January and they could drive the price up pretty fast. (By way of comparison, look at Speedy Gonzalez
Accrue Software - ACRU, 2.50 - which moved from 1 to 3 last week alone). VIAD capitulated from 3 in the last two weeks, on huge volume, and the big volume is still there on
the rally that just started. We just started nibbling at VIAD and we are looking to buy more of this stock next week in our accounts. You might want to do likewise.
This newsletter has received no compensation whatsover from any of the companies discussed above.
Geoworks (GWRX, 2.91) more than doubled on Friday on the news that GWRX and Openwave Systems (OPWV) agreed to settle their patent dispute by entering into a
royalty-free patent cross-license and a strategic business relationship in which Openwave receives a worldwide license to Geoworks' Flexible User Interface patent which
enables one application to run on a wide variety of devices, among other licenses. In turn, Geoworks will get a license to Openwave's patent for combining narrowband and
restricted narrowband channels for pushing rich content through broader channels, also over the next 18 months. AXT (AXTI, 33.06), a leading manufacturer of compound
semiconductor substrates and optoelectronic devices, will discontinue its laser diode and consumer product lines in 2001 in order to focus on its core businesses. As a result,
the company expects to record pre-tax charges of about $2.5M for the full-year 2000 and approximately $2.2M for loss from disposal. AXT announced that it will also recognize a
pre-tax gain of approximately $27.3M in the fourth quarter of 2000 for the Finisar Corporation stock that the company received earlier in the quarter. The company continues to
expect that Q4 2000 results for continuing operations in its substrate and visible emitter divisions will be in line with the guidance given earlier of revenue growth of 10-12% over
Q3 2000 and income from continuing operations between 17.5 and 18.5%. Earnings per share growth, net of extraordinary items, is expected to be 25 to 30% over Q3 2000. AXTI
is very much on track.
3Com (COMS, 8.50) reported a sharp decline in sales for its fiscal second quarter but its loss wasn't as bad as the networking-products maker projected when it issued a
warning earlier this month. For the three months ended Dec.1, 3Com said its net loss came to $142M, or 41c. On the next NAS rally, look for COMS to try top close the gap
between 10 and 12. Peregrine Systems (PRGN, 19.75) has completed its previously announced acquisition of the Tivoli Service Desk suite of products and has expanded its
sales and marketing relationships with IBM Global Services. There was also an analyst downgrade the prior week, which might explain the stock's small loss last week.
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Copyright AI
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Disclaimer: The writer of The Alert Investor (A.I.) is not currently a Registered Investment Advisor. It is the intent of A.I. to identify and research companies that it believes might prove profitable investments. However. A.I.
is not liable for any investment decisions by its readers and any use of the information provided is at the sole risk of the investor, who is strongly encouraged to do his or her research. The information contained herein is
provided as an information service only and past performance of featured companies does not guarantee the future success of an investment in that company. The writer of A.I. may, from time to time, hold positions in
stocks featured in A.I. or receive compensation for research or consulting services. The reader should assume that A.I. or its affiliates hold positions in the stocks mentioned in this newsletter, bought in the open market or
in private transactions, and that they will buy or sell some of these positions at any time, without notice. Affiliates of A.I. own 3,200 shares of VIAD, bought in the open market. Because A.I. is occasionally paid for its
services, there is an inherent conflict of interest in A.I. statements and opinions and therefore such statements and opinions cannot be considered independent. A.I. may make forward looking statements about all
companies mentioned and relies on various sources of information that we believe to be accurate and reliable. However, A.I. makes no claims or representations with regard to the accuracy, completeness or truthfulness
of any material contained herein. |
