2000 PICKS December 9, 1998
Quartet Making Cents
Hi-Tech, Pharmaceuticals Shine on Russell 2000
by Raymond Sammak
As autumn leaves and interest rates fell last month, the major stock indexes rose like balloons in the Macy's Thanksgiving Day Parade. The Russell 2000's gain of 26.28% in the seven weeks following Oct. 11 was only surpassed by the incredible 35.17% advance of the NASDAQ. Over the same period, the Dow gained 18.14% and the S&P 500 rose 21.12%.
Nevertheless, the Russell 2000 is still down 8% for the year, the only major index to lose ground in 1998. But for those who are paying attention, while the S&P 500 is trading at a price-to-earnings multiple of 22x, the Russell 2000 has a forward-looking P/E of only 17x. Likewise, the price-to-sales ratio is about 2x for the S&P but only 1.2x for the Russell. Below are four companies from among the ranks of the Russell 2000 we feel warrant a look.
Compound Interest
Isis Pharmaceuticals Inc. (ISIP), based in Carlsbad, Calif., develops new therapeutic compounds that have the potential to become new anti-sense drugs possessing more desirable pharmacological properties such as higher binding affinity, increased biostability and longer duration of action. As a result, anti-sense drugs have lower dosage requirements.
The company combines anti-sense technology with molecular and cellular biology to develop drugs targeted to combat certain infectious and inflammatory illnesses as well as certain types of cancer. Isis now has six anti-sense compounds in human clinical trials designed to treat retinitis in AIDS patients, Crohn's disease, renal transplant rejection, rheumatoid arthritis, colitis, psoriasis and asthma.
For the first nine months of 1998, Isis reported a loss of $26.3 million, or $0.98 per share, compared to a loss of $20.2 million, or $0.76 per share, for the same period in 1997. Although revenues during the same period rose to $34.8 million from $25.9 million, operating expenses rose to $54.4 million from $44.1 million for the first nine months in 1997. Isis borrowed a total of $40 million over the course of the fourth quarter of 1997 and the second quarter of 1998 under a ten-year debt restructuring arrangement that resulted in increased interest expenses.
"In the third quarter, Isis continued to exercise prudent cash management in support of our broad clinical development program," says B. Lynne Parshall, executive vice president and CEO. "As we near year end we remain pleased with our overall progress. Our inflammatory disease and cancer programs are advancing and we anticipate initiating a variety of additional clinical trials in 1999."
Weaving a Web
PSI Net Inc. (PSIX), based in Herndon, Va., provides corporate Internet and intranet access. The company, the first and largest independent commercial Internet service provider, also develops managed security services, electronic service solutions and Web hosting services throughout the United States and abroad. PSI Net is now capitalizing on explosive niches in the Internet market by becoming a one-stop-shop supplier for companies looking to set up sites on the Web.
PSI Net recently announced an agreement with NEXTLINK Communications Inc. (NXLK), one of the fastest growing telecommunications companies in the United States, providing local and long-distance services to businesses in 33 markets in 11 states.
America Online Inc.'s (AOL) recently announced purchase of Netscape Communications Corp. (NSCP) has helped fuel already manic interest in other Internet stocks like PSI Net. The stock was recently rated a new "buy" by analyst Daniel E. Zito at Legg Mason Wood Walker Inc., with a price target of $25. Analyst Vic Grover at Kaufman Brothers reiterated his rating of PSI Net as a short-term "buy" with a 12- to 18-month price target of $33 per share.
Shares of PSI Net, which recently traded at $18 5/8, are up 269% year-to-date and 180% over the last twelve months.
Memory Lane
Rambus Inc. (RMBS), based in Mountain View, Calif., develops and markets high-speed interface technology that allows semiconductor memory devices to keep pace with faster versions of processors and other equipment. The company licenses its interface technology to semiconductor manufacturers and companies that produce consumer electronics, personal computers, high speed communication devices and other computer systems. Intel Corp. (INTC), for example, has announced plans to enable Rambus technology to be used as main memory for mainstream-performance desktop personal computers in 1999.
On Oct. 14, 1998, Rambus reported financial results for the three- and twelve-month periods ended Sept. 30, 1998. Fourth-quarter revenues of $9.7 million were up 24% over the same period a year earlier and 5% over the prior quarter. Total revenues for the fiscal year ending Sept. 30, 1998 of $37.9 million represent a 46% increase from 1997. Operating income rose to $8 million compared to $2 million for fiscal 1997. Diluted earnings for fiscal 1998 were $0.28 per share, compared to $0.09 per share for fiscal 1997.
Although the stock is already up 89% year-to-date and trades at a lofty P/E multiple, shares of Rambus were recently rated a "buy" in new coverage by analyst Drew Peck at SG Cowen. Consensus estimates call for earnings of $0.40 per share for fiscal 1999, to jump to $1.09 per share in fiscal 2000.
Shares of Rambus Inc. recently traded at $94 7/8.
Take Heart
Cor Therapeutics Inc. (CORR) develops and markets new pharmaceutical products for the treatment and prevention of severe cardiovascular diseases such as unstable angina, acute myocardial infarction, deep vein thrombosis and restenosis.
On Oct. 21, 1998, the company reported revenues of $2.85 million for the quarter ended Sep. 30, 1998, compared with revenues of $2.91 million for the same period last year. Third-quarter revenues resulted primarily from the company's collaboration with Schering-Plough Corp. (SGP), which paid Cor Therapeutics $24 million in connection with FDA approval of the clot-preventing drug Integrilin. Industry analysts expect the drug and its competitors to eventually create a $1.5 billion market for clot-preventing medications.
Cor Therapeutics reported total revenues of $35.77 million for the nine months ended Sep. 30, 1998, compared to revenues of $15.81 million for the same period in 1997. However, the company reported a net loss of $16.28 million, or $0.67 per share for the third quarter of 1998, compared with a net loss of $10.86 million, or $0.54 per share for the third quarter in 1997. As of Sep. 30, 1998, the company had cash, cash equivalents and short-term investments of nearly $81 million.
Shares of Cor Therapeutics Inc. recently traded at $12 5/16, approximately half their 52-week high of $24 7/8.
This report is based on data from sources we consider to be reliable but it is not guaranteed as to accuracy and does not purport to be complete. This report is not to be construed as a representation or as an offer to sell or buy any security mentioned. From time to time, Raymond Sammak may have a long or short position in the securities highlighted in this report.
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