Sunday, December 16 2001 copiaassoc@aol.com
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Volume VIII
Although many investors might disagree after enduring one of the worst bear markets in history during the past two years, nothing goes up or down forever. After surging an astonishing 731 points from its intra-day low on September 21st, the NASDAQ succumbed to a round of profit-taking for the first time in six weeks, as the index fell 68 points, or 3.4% for the week. The Dow also declined for the week, dropping 238 points, or 2.4%. Who were the culprits? Merck (NASDAQ: MRK) didn’t help, as the pharmaceutical giant announced that it expected no growth next year. This caused the stock to decline almost 10% on Tuesday (destroying almost $15 billion of market capitalization in the process) and took the NASDAQ with it. Previously, investors had bid the markets up after the Fed reduced interest rates for the 11th time this year. Ciena (NASDAQ: CIEN) and Lucent (NYSE: LU) did not help on Thursday, as earnings warnings from both took the optical and telecom sectors down further.
What should we learn from this? The markets are in what is referred to as "confession" season, and this will be a key week for Corporate America to "fess up" to investors, if it believes that it will miss the earnings forecasts that it provides analysts. There will also be a few earnings announcements and several key analyst meetings. On Monday, General Electric’s (NYSE: GE) still-new CEO Jeffrey Immelt hosts a dinner with analysts, where he is expected to reiterate its guidance. Tuesday, electronics retailers Circuit City (NYSE: CC) and Best Buy (NYSE: BB) announce third-quarter results. Computer chipmaker Micron Technology (NYSE: MU) could reveal through its first quarter results how the demand for PC’s are shaping up. Wednesday brings results from FedEx ( NYSE: FDX), Morgan Stanley (NYSE: MWD) and hand-held device-maker Palm (NASDAQ: PALM). Thursday, the brokerage firms continue to post results, as Lehman Brothers (NYSE: LEH) and Goldman Sachs (NYSE: GS) issue numbers. The same day technology companies Solectron (NYSE: SLR), a contract manufacturer, and Jabil Circuit (NYSE: JBL) release results as well.
The NASDAQ is at two key technical support levels, as its sits just above its 200-day simple moving average of 1935 and its 20-day exponential average of 1937. The Index goes through its annual rebalancing on December 24th, and the announcement of which companies will be included and excluded will be made on Monday. Telecom companies such as XO Communications (NASDAQ: XOXO), (it has already received a de-listing notice from the Exchange), Level 3 Communications (LVLT) and Metromedia Fiber (MFNX) are certain to be eliminated from the Index. This will reduce the telecom weighting of the sector from 19% at the end of 2000 to approximately 13%. Other household names such as CNET (CNET), CMGI (CMGI), Palm (PALM) and Ariba (ARBA) are likely to go as well. Who is likely to benefit? The biotech sector should see greater representation in the new Index. This could help the stock of such companies as Protein Design Labs (PDLI), Icos (ICOS) and Imclone Systems (IMCL). It could even make the Index less volatile.
On the economic front, investors will receive information on new housing units on Tuesday. The number is expected to increase to 1.59 million in November, helped by mild weather conditions facilitating construction. Wednesday brings the weekly jobless claims number. Finally, Friday brings revised third-quarter GDP (do we need another reminder we are in a recession?), and the University of Michigan’s December sentiment index. It is expected that it will increase to 87, the highest since August.
Investors should keep a close eye on tax-loss selling in the final weeks of the year, as it will create tremendous opportunities in certain micro-cap stocks that are less liquid and are more prone to volatile movements in price. Every year, there are a handful of investors in each small stock that create tremendous selling pressure by liquidating their positions late in the year to create losses to offset earlier gains taken in other stocks. Since micro-cap stocks are often less liquid, this lack of trading often means that bids from market makers will drop sharply because of the selling pressure. This creates an attractive entry point for many investors. Investors who put in out of the money limit orders to buy stocks may be surprised when they see those orders executed, but there will be bargains in many stocks.
While this week may be a volatile period for the markets, the last week of the year has historically been the best week of the entire year for the markets. There are few earnings warnings, as most executives are out for the holidays. Investors tend to be optimistic that the next year could be brighter. Even during last year’s meltdown, the NASDAQ gained nearly 2.5% during the final week. The Dow and NASDAQ have been higher during the final week of the year for the past five years, and almost all of the gains for the fourth quarter (the best performing quarter of the year) have come from the final week.
The IPO market has returned strongly with a recent resurgence in offerings. One company that recently went public is Netscreen Technologies (NASDAQ: NSCN). The computer security company saw its shares surge nearly 50% on its first day of trading, as investors snap-up nearly anything that is related to the computer security area. One small company that will be doing a spin-off to investors of its security business is CT Holdings (OTCBB: CITN). The company has a market valuation of approximately $22 million, but we believe that its shares are headed higher as a result of the many opportunities created for computer security. The company anticipates that the record date for the spin-off of Citadel Technologies should be on or about January 21st, giving investors a current opportunity to buy the stock and receive interests in two technology companies AND an emerging security concern. The stock looks strong technically, as it has doubled in price in the past two months around increasing volume. It is currently consolidating around $0.45, giving investors a solid entry point.
SPECIAL SITUATIONS
Top Image Systems (NASDAQ: TISA) $2.89
It is unusual for many micro-cap NASDAQ stocks to be at or near their 52-week highs, and even more rare for small technology stocks. However, Top Image Systems, a leader provider of enterprise solutions for managing content entering organizations, is in just such a position. The company recently announced a 35% sequential increase in core operations recently when it released its third-quarter results, and has seen the stock nearly triple in three months. It has also seen substantial increases in volume, as investors begin to notice that the company has increased revenues each quarter this year. In addition, the company has gone from a loss of $6 million last year to net income in the third quarter. Despite this, the company trades at a level that is just above its cash position, as it had $2.12 per share in cash as of its last reporting date. The company recently launched eFLOW, its unified content management platform. The early response suggests that it should continue its solid growth, and with investors paying attention to the stock, it could set a new 52-week high this week.
I-Trax Inc. (OTCBB: IMTX) $1.60
This is another micro-cap with solid fundamentals and an excellent technical basis. The company is a population health management company, and is well-positioned to benefit from growing security concerns. Unlike many small companies that have tried to modify their business models to capitalize on current security concerns, the company has a substantial and growing presence in the area. The company recently installed its eImmune software, for tracking immunization and skin test data, at the Pentagon. The software is designed to expedite the immunization process. The healthcare clinic within the Pentagon utilized it over Thanksgiving to administer 12,000 flu shots. The Pentagon will also use eImmune to interface with the United States Army's Medical Occupational Data System as a critical component in the Soldier Readiness Program. The company has only recently begun to address the numerous opportunities for the software in the bio-terrorism area. The stock should benefit this week from a high-profile news conference that is scheduled to take place at the Pentagon in which it will participate. This national exposure should create additional momentum for the stock, and investors that get in before the conference should benefit. The stock has more than doubled in the past two months, and increased from $1.35 to $1.60 this week on volume which was nearly double the previous week’s. The combination of growing high-profile opportunities in the bio-terrorism area and a solid technical basis could cause the stock to re-test its 52-week high of $3.00 before year-end.
Arc Wireless Solutions, Inc. (OTCBB: ARCS) $0.21
Wireless stocks have not been in favor this year, and Arc Wireless has been no exception. The stock was trading at its 52-week low until Friday. This wireless technology company is involved in marketing, distribution and servicing, as well as selective design and manufacturing, of a broad range of component and network solutions in support of wireless applications. The stock surged 50% on Friday on nearly one million shares of volume on the news that it had added Qwest Wireless and Voicestream to its customer base for its base station antennas. The company’s base station antenna customers already include AT&T Wireless and Bechtel. ARC Wireless acquired certain commercial assets that included the base station antenna products from Ball Aerospace and Technology Corp. in August of this year and began production of the products this month at its Wheat Ridge, Colorado. Since the company is now in production, it could generate substantial revenues from relationships with these industry leaders. How many wireless companies with a market value of less than $50 million can claim relationships with such industry titans? We believe few.
The company also produces a hands-free antenna called the Galaxy antenna. The antenna is designed to improve reception in car phones, where reception can often be a problem. Instead of the antenna being at ear level, it is located below the dash in the metal body of the car. These locations provide very poor reception. The antenna, which is easily installed, provides a significant improvement to the sound quality and reception. The antenna retails for $59.95, including shipping. For those investors who would like to try the product, we have arranged a special promotion for CEOcast subscribers. We have negotiated a special price of $50 with Arc Wireless, so that our subscribers who are experiencing problems with their car phones can benefit from this antenna. If you would like to purchase one through this special promotion, you may do so by going to antennas.com. |
