SMARTMONEY.COM DAILY SCREEN:
Looking For A Momentum Fix
By KARYN MCCORMACK
Smartmoney.com
NEW YORK -- Move over, value. Momentum investors are back - and
leading the Nasdaq to record highs once again. Sure, Wall Street shoppers
still have room in their shopping carts for some cyclical and beaten-down
stocks. But they can't forget the thrill of getting in on a hot technology stock
when it starts taking off.
Here's where our momentum screen comes in handy. To find
up-and-comers, we usually enlist the CANSLIM screen developed by
Investor's Business Daily founder William O'Neil.
This time, though, we upped the ante a bit, searching for companies that look
to be at the very cusp of accelerating earnings growth, rather than ones with
a solid history of earnings gains. We also wanted stocks that have performed
in the top 10% of all stocks listed in Zacks Investment Research's database
for the last six months (through last Friday), and are at or near new highs.
This formula may be a little more risky because stocks that rise this fast can
crumble even faster. Day traders and other momentum investors move in
and out of such stocks at the drop of a hat. So for a little peace of mind, we
stuck with O'Neil's requirements for projected long-term annual earnings
growth of at least 30% and very little debt.
One of the 22 stocks that made the cut is Terayon Communication Systems
(TERN). Shares of the maker of broadband-communications equipment
jumped about 57% this week alone to $125.38 - on top of a 104% gain in the
last six months.
That was thanks to a huge fourth-quarter earnings surprise driven by
stronger-than-expected sales of its cable modems and head-ends used in
centralized cable-broadcasting centers. Terayon reported earnings for the
first time of four cents a share, excluding one-time charges and amortization
of goodwill related to acquisitions, compared with a 33-cents-a-share loss in
the same period a year ago. That blew away analysts' consensus forecast of
an 18-cents-a-share loss and predictions that the company wouldn't be
profitable for another three quarters. Terayon's fourth-quarter revenue
increased 199% from a year ago and 65% from the third quarter to $38.7
million, about $10 million above expectations.
The results prompted analysts to hike their earnings forecasts for this year
and next, and issue some gushing remarks. Calling the cable-modem market
"lava hot," Lehman Brothers' Steven Levy bumped up his earnings-per-share
forecasts for this year and next to 13 cents and 55 cents, respectively, from
an estimated loss of 6 cents and profit of 52 cents.
And Timothy Long at Merrill Lynch raised his rating on the stock to Buy
from Accumulate. He believes Terayon gained market share in cable
modems last quarter and can make more headway. Last month, CableLabs,
a group that sets standards for the cable industry, said Terayon's modem
(which is based on synchronous code division multiple access (CDMA)
technology) meets the data-over-cable service interface specification
(DOCSIS) 1.0 standard. And Terayon's technology could be used in the next
generation of DOCSIS modems, which will let voice travel over cable lines
along with data, if it meets the standard and is cost-effective. That, in turn,
would give Terayona competitive advantage and "provide upside to our
revenue and EPS estimates for 2001," Long wrote in a note.
Last quarter, Terayon's three biggest modem customers were Rogers
Communications (RG), Shaw Communications (SJR) and United
Pan-Europe Communications. The company also recently announced a
contract with i-Cable, Hong Kong's only pay-TV operator, for the
deployment of a cable-modem system. This deal is worth $100 million over
the next several years and opens the door to other opportunities in China,
Long says.
With the expansion into other broadband technologies, the company says it
added other cable customers such as Adelphia Communications (ADLAC),
Charter Communications (CHTR), Comcast (CMCSK), Cox
Communications (COX) and Time Warner (TWX). Last year, the company
made three acquisitions for about $250 million to marry its cable-modem
products to video routing and circuit-switched voice products, as well as
enter the market for digital subscriber line concentrators.
The video-routing product allows cable operators to add and drop channels
on their system and insert local advertising. The circuit-switched voice
systems let voice travel over cable wire just as it does over phone wires.
And the DSL concentrators allow DSL lines to accept many signals from
various modems connected to one phone line and turn them into one signal
back to the operator.
The question is, can Terayon's shares also break new ground? Analysts
seem to agree that new products and additional customers will boost
earnings, and therefore buoy the stock. Lehman's Levy, who praised the
company for beating expectations every quarter since going public in August
1998, raised his year-end target for the stock to $125 a share, from $90. In
true momentum fashion, the analyst "strongly encourage[s] investors to build
a position before this volcano erupts again and leaves disbelievers buried
under its ashes."
Momentum players are also piling into Kopin (KOPN), a dominant supplier
of gallium arsenide HBT (or heterojunction bipolar transistor) wafers for the
wireless handset market. Chipmakers use these wafers to make power
amplifier circuits that allow clearer signals in wireless phones, while using
less power. Demand for HBT wafers is exploding, analysts say, as wireless
phone makers race to provide phones that can carry voice and data with less
distortion and more battery power. Kopin also makes high-resolution
miniature color displays called CyberDisplay, used in camcorders and digital
cameras made by JVC, Siemens and others.
Earlier this week, the stock climbed $16, or 27%, to a new high of $76 a
share, but had slipped back to $68.88 by today. That's on top of a 230%
surge over the last six months.
Though Kopin appears to have a great story, the huge one-day pop caught a
lot of shareholders off guard. One possible explanation tossed around in
Yahoo!'s online chat rooms was a recommendation on Microsoft's
MoneyCentral site by popular columnist Jon Markman. Others speculated
that the company could be acquired. The action actually attracted some
institutions to inquire about it, says analyst Karl Motey at C.E. Unterberg,
Towbin.
But analysts are more intrigued by news that Kopin will double its capacity
by adding eight more HBT production systems this year, which should
significantly boost earnings and revenue next year. Between the start of last
year and this March, the company will have quadrupled its capacity to meet
demand for its HBT wafers, says Joel Pitt, at Credit Suisse First Boston.
Kopin's main customer is Conexant Systems (CNXT), which announced
plans to triple production of HBT-based integrated circuits this year and has
contracts with Ericsson (ERICY). Mitsubishi Electronics has already placed
orders with Kopin, and Pitt figures Nortel (NT) and other circuit makers
could become customers.
Kopin doesn't have much competition. RF Micro Devices (RFMD), the only
other significant producer of HBT wafers, "can't even supply enough to meet
its own needs," Pitt says. Anadigics (ANAD) and Alpha Industries (AHAA)
have announced plans to get into the business, but Motey says that demand
for the wafers will probably continue to outstrip supply for the next year or
longer.
Kopin's additional capacity prompted both Pitt and Motey to hike their
earnings and revenue estimates for this year. Pitt now expects Kopin to earn
47 cents a share, up from his previous forecast of 40 cents a share and a big
jump from the estimates of zero earnings for 1999. He expects revenue to
jump 123% this year to $83 million and again next year to $154 million. And
those estimates could be "conservative," Pitt says.
Still, the stock could give back some - if not all - of that huge gain in the next
few days. "We think the company has a really great story," says Pitt. "But
the stock may very well reflect unrealistic expectations."
In momentum tech, that's nothing new.
For more information and analysis of companies and mutual funds, visit
SmartMoney.com at smartmoney.com
Briefing Book for: KOPN |
