A little on EMC
Subject:
INVESTools Advisory, July 26-30, 1999
Date:
Sat, 31 Jul 1999 00:06:10 -0700
From:
Advisory <Advisory@member.investools.com>
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Advisory <Advisory@member.investools.com>
The INVESTools Advisory, July 26-30, 1999
A Free Digest of Trusted Investment Advice
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In This Issue:
1. AOL on a Roll Despite Shorts (AOL)
2. EMC: Bet Against Misplaced Bearish Sentiment (EMC)
3. New Recommendation: Accumulate Oracle (ORCL)
4. Wall of Worry? Buying Opportunity. (AEOS)
5. Four Stocks Standing Up to Today's Volatility (QCOM)
6. Merck Retreats into Good Buying Range (MRK)
7. Outsourced Drug and Biotech Gains (AMRI)
8. Making Computers Easier for Chinese to Use (ZICA)
9. Wait for Pullbacks on Three High-Octane DRIPs (GDT)
10. Keeping Food Retailers Up-to-speed (POSI)
11. Join the discussions
investools.com
12. Disclaimer
13. To Cancel this Free E-mail Service
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The INVESTools Advisory, July 26-30, 1999
By John Brobst, Editorial Director, INVESTools.com
1. AOL on a Roll Despite Shorts (AOL)
America Online (AOL) recently posted Q4 1999 earnings almost
three times those of a year ago. Impressive gains in
revenues from online advertising, e-commerce and new
subscriber growth propelled AOL's earnings past Wall Street
estimates by $0.03 per share. Analysts are bullish that
AOL's recent purchase of Netscape Communications will give
the firm a significant portion of Internet traffic, and an
alliance with Sun Microsystems should further grow AOL's e-
commerce revenues.
Bernie Schaeffer points out that despite AOL's good results,
option players are betting heavily that stock in the online
leader is headed for a fall. AOL is currently the 14th most
heavily shorted stock on the NYSE. Put players recently
added huge numbers of contracts at the August 110, 115 and
120 strike prices. This is a bullish sign to the contrarian
Schaeffer, who holds that most option investors are wrong
most of the time.
Momentum is one factor on AOL's side. AOL recently took a
breather after a seven-month run that propelled the stock
upward by more than 900%. Schaeffer notes that AOL appears
rested and ready for another run. "During its recent
travails, the stock relied on its 10-month moving average,
which has contained all intramonth pullbacks since October.
Last month, the 10-month trendline served as a foundation
for AOL's rebound," he said, and it should continue to do
so. Schaeffer recently recommended buying the October 115
call (AOOJC).
For more on Bernie Schaeffer's recommendation see
"Aggressive Portfolio," August 1999, The Option Advisor.
Bernie Schaeffer provides practical options recommendations
that are simple to understand and execute.
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-----------------------------------------------------------
2. EMC: Bet Against Misplaced Bearish Sentiment (EMC)
Things would seem to be going well for EMC Corp. (EMC). The
data storage king just beat analyst estimates by $0.03 per
share by posting Q2 1999 EPS of $0.27. Demand remains strong
for the firm's Symmetrix line of data storage products, and
both licensing revenue and margins from software licensing
are recording impressive gains. Option investor Bernie
Schaeffer notes that this is the EMC's sixth consecutive
positive earnings surprise, but he goes on to say that
investors are still unsure about the firm's prospects. Stock
in EMC took a tumble in April after another company in the
sector issued an earnings warning and has been wavering
since.
Schaeffer is making bullish option bets on EMC. One reason
is a robust technical picture. He notes that shares in EMC
rose 25% over the past five weeks after basing between April
and June. EMC's 20-week moving average is playing key
support during the current rally as it has contained all
daily closing prices and all but two intraday price
retreats. Last week's broad market sell-off pushed the stock
back to support levels near $59, and Schaeffer says this
level "has served as both support and resistance over the
near term."
He also says support at the $60 strike price has been
bolstered by more than 4,000 puts at that level. "Short-
interest players are banking on a downtrend, as short
interest stands at nearly 27.8 million shares, making EMC
the 10th most shorted stock on the NYSE," Schaeffer says.
This is a bullish sign to the contrarian Schaeffer. He
recently recommended buying the October 55 call (EMBJK).
For more on Bernie Schaeffer's recommendation see
"Aggressive Portfolio," August 1999, The Option Advisor.
Bernie Schaeffer provides practical options recommendations
that are simple to understand and execute.
For a 30-day free trial go to:
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-----------------------------------------------------------
3. New Recommendation: Accumulate Oracle (ORCL)
Dow theory advisor Rich Moroney recently added database
leader Oracle (ORCL) to his recommended list. "Oracle's
recent rally off a $23 bottom has been swift, but we believe
the stock has more potential," he says. The firm just
chalked up quarter that saw sales surge 22% and per-share
earnings jump 37%. Oracle beat growth expectations in all
three of its main revenue streams -- software, database
licenses and applications. "This helped quiet concerns that
overseas sales would remain sluggish and depress earnings,"
Moroney says. In fact, sales growth in Asia is on a rebound.
The strong May quarter allayed investor fears about pricing
pressure in the industry, Moroney says. Also comforting
investors is how management is focusing on controlling
expenses as never before and thrusting the firm into e-
commerce with verve. For instance, the firm's new Oracle8i
database gives the firm the lead in the lucrative market for
Internet-based management systems. Y2K concerns slowed sales
temporarily, but Moroney says this slowdown should be
"short-lived."
"Oracle seems likely to resume its strong sales growth again
within the next few quarters," Moroney says. He predicts the
firm will beat analyst estimates in the next quarter and
resume its 25%+ year-over-year sales growth, which would
mean 30-35% earnings growth. "Investors should dollar-cost
average into Oracle over the next several months.
Alternatively, a pullback near $33 may be used for more
aggressive buying," Moroney says.
For more on Rich Moroney's recommendation see "Nasdaq
Spotlight," July 26, 1999, Dow Theory Forecasts. Rich
Moroney uses the time-tested Dow Theory to provide award-
winning stock picks and portfolios as well as to keep
investors on the right side of major market trends.
Published weekly since 1946, the newsletter has withstood
the test of time. Worth Magazine recently said Dow Theory
Forecasts is one of the best investment newsletters
available.
For a 30-day free trial go to:
member.investools.com
-----------------------------------------------------------
4. Wall of Worry? Buying Opportunity. (AEOS)
Gregory Spear sees a consensus of caution among the
investment newsletter writers and Wall Street analysts that
he tracks. Spear says today's wall of worry should result in
buying opportunities for investors as these fears are
overblown. After all, the economy is strong, inflation is
under control and interest rates remain low.
"The key to being able to tell corrections from the early
hours of a crash or a bear market is the apparent reason for
the drop," Spear says. He gives three reasons why the
current drop is a correction and not the start of bearish
times. First, the market has enjoyed a healthy recently, and
a correction will keep the rally on track. Second, there is
a scarcity of bad news to keep the bears fed. Instead, there
is plenty of good news such as plenty of companies reporting
record earnings and positive surprises. "Still the stocks
sell off. This is called profit taking. Nothing more," Spear
says. Third, he sees investors picking up top-shelf stocks
at bargain prices, and that will bid prices higher.
To take advantage of this opportunity, Spear offers a list
of nine "Best Buys" followed by his preferred analysts.
These include American Eagle Outfitters (AEOS), Broadcom
(BRCM), CMGI (CMGI), CVS (CVS), Dell Computer (DELL), Lucent
Technologies (LU), Northern Telecom (NT), Sun Microsystems
(SUNW) and Yahoo (YHOO).
For more on Gregory Spear's recommendation see "The View
>From The Letters," July 26, 1999, The Spear Report. Gregory
Spear offers consensus stock picks from the best performing
advisory services in the US today. For a 30-day free trial
go to:
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-----------------------------------------------------------
5. Four Stocks Standing Up to Today's Volatility (QCOM)
In a July 27 hotline to subscribers, momentum investor
Carlton Lutts reported that three of his four market timing
indicators are in negative territory. He responded by
retracting buy recommendations on four of the eight stocks
in his model portfolio. "In Cabot's Model Portfolio, we're
rating only the four strongest stocks buy," Lutts says, as
each is showing exceptional strength despite the current
market volatility.
One of these stocks is Qualcomm (QCOM). Shares in the
communications equipment leader rocketed more than 200%
year-to-date after a huge Q2 1999 earnings surprise and the
settlement of a dispute with Ericsson. Qualcomm is now a key
licensor of the CDMA, a digital cellular technology that
offers superior performance, lower noise and a greater
variety of services than analog cellular systems. CDMA is
also the fastest growing digital standard in the world, and
CDMA subscribers should surpass 30 million in 1999 vs. 20
million in 1998.
"Someday, all over the world, wireless systems will carry
more phone calls than phone lines," Lutts says. Qualcomm
gets a royalty on every CDMA handset, each base station sold
by licensees, and one-time fees from equipment makers.
Qualcomm is also the leading CDMA handset maker. "Investors
are accumulating this stock because they expect demand for
CDMA products to keep producing profits for Qualcomm," Lutts
says. He maintains his buy recommendation.
For more on Carlton Lutts' recommendations see "Hotline,"
July 27, 1999, The Cabot Market Letter. Growth stock
investor Carlton Lutts uses fundamental analysis and looks
for upward market trends and positive stock momentum to
identify tomorrow's superstars before their share prices
soar. Lutts earned a 25% average annual return for the past
three years and 26% for the past five years according to
Hulbert Financial Digest, the independent newsletter
tracking service.
For a 30-day free trial go to:
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-----------------------------------------------------------
6. Merck Retreats into Good Buying Range (MRK)
Stock in pharmaceutical leader Merck (MRK) has dropped from
last year's high above $85 to below $70 for a number of
reasons. For instance, investors are afraid of upcoming
patent expirations on a number of lucrative Merck drugs,
which now account for roughly 24% of the firm's revenue.
These include Pepcid (ulcers), Mevacor (cholesterol),
Vasotec and Prinivil (hypertension) and Prilosec
(gastrointestinal). Analysts fear that Merck's pipeline of
new drugs may not compensate as lower-priced generic
versions take away revenue. Another worry is that Medicare
reform may steal away profits.
Dow theory investor Rich Moroney looks to the longer term.
"While Wall Street's concerns are understandable and likely
to linger in the near term, they have created an attractive
buy opportunity for long-term investors," he says. With a
P/E ratio near 30, Merck now sells at one of its lowest
valuations in years. Moroney is also more optimistic than
others about Merck's newer drugs. For example, the prognosis
is good for strong sales of Vioxx, Merck's new Cox-2
inhibitor pain medication. Singulair (asthma) and Fosamax
are "potential blockbusters," Moroney says, and Cozaar
(hypertension) continues to grow rapidly even though it
surpassed $1 billion of sales in 1998. Also up Merck's
sleeve is MK-869, a compound that failed in trials to treat
depression but may be an effective treatment for nausea in
chemotherapy patients.
March quarter results were disappointing, and Moroney sees a
deceleration of profit growth into 2001. "Such a
deceleration is already built into the stock," he says.
Analysts predict Merck will return $2.45 per share in 1999,
meaning that the stock trades at a 20% discount to the
average P/E multiple of large drug companies. Moroney sees
the potential for Merck to merge with "a peer firm" or buy a
biotech company with a hot product. "In the meantime, the
company will continue to do what it does best -- research
and market drugs," he says. He maintains a buy
recommendation.
For more on Rich Moroney's recommendation see "Analysts'
Choice," July 26, 1999, Dow Theory Forecasts. Rich Moroney
uses the time-tested Dow Theory to provide award-winning
stock picks and portfolios as well as to keep investors on
the right side of major market trends. Published weekly
since 1946, the newsletter has withstood the test of time.
Dow Theory Forecasts was ranked among the top three
newsletters for market timing over the past 15 years by the
independent Hulbert Financial Digest.
For a 30-day free trial go to:
member.investools.com
-----------------------------------------------------------
7. Outsourced Drug and Biotech Gains (AMRI)
Drug and biotech firms need to focus on discovering and
developing new wonders and getting them to market quickly.
So they often streamline their own operations by outsourcing
necessary but non-core specialties. One of these sidelines
is chemistry R&D services, and Tom Bishop, Editor of BI
Research, says Albany Molecular Research (AMRI) is doing
quite well by handling specialties like small-scale
manufacturing, analytical chemistry, medicinal chemistry and
chemical development for major clients.
"Many drug firms have supplemented their internal research
by outsourcing. Albany is one of the only companies that
offers a broad range of services," Bishop says. In fact,
Albany has conducted more than 400 projects for over 100
clients, including such industry giants as Eli Lilly and
Pfizer. Albany also does some of its own R&D. One of its
projects in this vein resulted in a patent of a pure form of
an antihistamine that does not cause drowsiness. Hoechst
Marion Roussel markets this under the brand name "Allegra"
in the US.
Albany's financial picture shows the firm is on the right
track. Over the past five years, the company has earned a
66% annual growth rate in net revenue from contracts. Bishop
predicts EPS will grow 74% to $0.94 in 1999 and to $1.16 in
2000. "So if you're looking for a rapidly growing company
riding a clear trend, you're there," Bishop says. He
recommends buying on pullbacks to $32.50.
For more on Tom Bishop's recommendation see "Quick Picks
#4," July 19, 1999, Dick Davis Digest. The digest culls
through over 400 leading investment publications and
highlights compelling and promising opportunities for
growth. Each issue also features top advisors giving the
broad market direction in non-technical language and a
highlighted special situation or outstanding group of
stocks.
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-----------------------------------------------------------
8. Making Computers Easier for Chinese to Use (ZICA)
A cultural barrier to expanding computer use into Chinese-
speaking countries has been the difficulty for a user to
input Chinese characters into a computer. Zi Corporation
(ZICA) developed a system that makes this kind of text input
intuitive. Small-cap investor Richard Geist is particularly
excited about the company's joint venture with the "China
Huayu," a subsidiary of the Chinese Ministry of Education.
China Huayu is a responsible for distributing products into
the Chinese School System.
Geist says it's still too early to declare Zi as the
standard in China. But since the Ministry of Education is
among the senior ministries in the Chinese government, its
implied endorsement of Zi will carry through to other senior
government ministries. It will then trickle down to Chinese
manufacturers and "more or less force the need for Zi's
input system on all their equipment," he says. This should
include computers, set top boxes and cell phones, he says.
Zi also has licensing agreements with Ericsson, Network
Computer Inc., and Xoceco to put their input system into
mobile phones, PCs, TV set top boxes and other consumer
electronic products.
Gauging the Ministry of Education computer opportunity
alone, Geist estimates that the Chinese government will want
one computer for every 20 students, meaning 12 million
computers for schools. Zi will receive about $1 for each
computer from China Huayu, and since their production
capacity is roughly 600,000 computers per year the rest will
come from Chinese companies like Great Wall and Legend, from
which Zi will receive $2 per machine. That should seed other
opportunities in universities, other ministries and general
computer sales, Geist says. Another market is the 317
million TVs in China that could use set top boxes with Zi
software, as is the exploding cell phone market and the 33
million Chinese projected to log on to the Internet in the
next few years. Geist maintains a buy recommendation on Zi.
For more on Richard Geist's recommendation see "Highlighted
Stocks," August 1999, Richard Geist's Strategic Investing.
Richard Geist integrates psychological aspects of investing
into a methodology for selecting small company stocks.
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9. Wait for Pullbacks on Three High-Octane DRIPs (GDT)
Dividend reinvestment plan (DRIP) guru Chuck Carlson says
that his style of investing can seem slow and stodgy.
"Actually, slow and stodgy is perhaps the best way to build
wealth," he says. But for those wanting to add some spice to
conservative portfolios, Carlson recommends watching for
buying opportunities in three "aggressive, high-flying
stocks" that offer "high-octane DRIPs."
One of these is Guidant Corp. (GDT), a spin-off of drug
giant Eli Lilly that makes an array of medical technical
equipment to treat cardiovascular disease. Guidant own more
than 50% of the stent market; a stent is a cylindrical
device inserted into a coronary artery at the time of a
balloon angioplasty to prevent a collapse of the artery.
Carlson predicts pricing pressure in the stent market as
rivals Boston Scientific and Medtonic launch competing
products. But Guidant also has new products in its pipeline,
and analysts predict stent prices will solidify and that
Guidant will hold on to its market share.
Stock in Guidant retreated from a 52-week high near $70
earlier this year to its current $60 level, and Carlson
cites Wall Street worries about how the new products will
play out. GDT now trades at 44x estimate 1999 earnings of
$1.36, pricey by industry standards, so Carlson advises
waiting for a pullback to the high $40s or low $50s. "I'm a
big fan of Guidant and give it "five stars" for its
favorable long-term prospects," he says.
For more on Chuck Carlson's recommendation see "Special
Report," August 1999, DRIP Investor. Chuck Carlson provides
timely and on-target guidance to buying stocks without a
broker via dividend reinvestment plans (DRIPs). He also
built a portfolio around DRIPs. These plans let investors
build a stock portfolio with small amounts by investing
directly with the company. Nearly 1,000 of the world's best
companies offer DRIPs -- household names like McDonald's,
Coca-Cola, Merck, Intel, General Electric and AT&T, along
with up-and-comers like Paychex, Equifax and Home Depot.
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-----------------------------------------------------------
10. Keeping Food Retailers Up-to-speed (POSI)
Small-cap investor Geoff Eiten sees little choice for food
retailers but to buy new computer systems. Competitive and
market dynamics force them to invest in new, real-time point
of sale and other transaction information to make better
decisions about managing inventory, pricing, promotions, and
shelf space. Most legacy systems are based on architectures
that are closed, proprietary, outdated and unable to deliver
what today's market demands. They are also expensive and
difficult to maintain. In fact, the limited functionality of
these older systems makes them a competitive liability,
according to Eiten.
This gives companies like Point of Sale Ltd. (POSI) a $4
billion market in the US alone, Eiten says. Point of Sale
provides state-of-the-art solutions to supermarkets,
convenience stores and restaurants in over 9,000 stores
across more than 30 countries. The company's systems offer
complete host-based data management and reporting, data
communications between stores and the host, and complete in-
store systems with the most up-to-date visual POS and back-
office management functionality. Current clients include
Tesco Stores (UK's #1 food retailer), White Hen Pantry,
United Dairy Farmers and Yellow, soon to become Israel's
first convenience store chain.
Financial results show that Point of Sale is making good in
this compelling market. Revenues increased nearly 47% to
$5.1 million for the first quarter, which ended March 31,
1999. Net income for the period also increased to $1.3
million vs. last year's $805,000. The firm also plans to
expand more aggressively into convenience stores and is
developing software for online and self-scanning
applications. Eiten also notes that the company just secured
contracts to put its wares into several hundred stores.
"POSI is a solid company with what appears to be a very
solid future," Eiten says. He maintains a buy
recommendation.
For more on Geoff Eiten's recommendation see "This Month's
Recommendation," July 15, 1999, OTC Growth Stock Watch.
Geoff Eiten advises on high-growth, low long-term debt,
niche-oriented firms with sales of $5-100 million.
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