Little Known Net Stocks
marketguide.com
Little Known Net Stocks
By Marc H. Gerstein
February 9, 2000
This week, Market Guide's database contains 203 internet stocks that have no identifiable analyst coverage. Are they unworthy of attention? Or, does this present opportunities to jump in ahead of the crowd?.
Analyst Coverage: What Does It Mean?
Stock screening tools may, truly, be one of the great modern inventions. In a matter of minutes, I can sift through hundreds of data items on thousands of stocks and select a handful that stand out under whatever selection methods I devise. But to screen a effectively, it's important to view the process as both science and art.
The latter is needed because numbers don't always tell a complete story. That's why I usually envision screening, not as a final answer, but as a process that creates a manageable-sized list of stocks that will be then reviewed using qualitative, as well as number-based, factors. But I can also use the screen to jump start the subjective tasks, by adding tests that open a window into the collective judgement of others in the investment community who, presumably, have thought about the companies.
I often like to use analyst coverage this way. Sometimes, I want to know how accurately they predict EPS. At other times, I'm interested in estimate revisions. And sometimes, I just want to know how many analysts, if any, are even bothering to look at a company. The latter can be especially interesting in the internet sector, which is well populated with fledgling businesses. If a brokerage house analyst serving institutional clients finds it worthwhile to expend time and energy covering a company with quarterly sales of $1 million, that might serve as a useful signal.
The operative word in the last sentence is "might." One reader, Jon Jacobs, suggested that such coverage can be from an analyst at the firm that underwrote the company's IPO. In this circumstance, coverage would be more a matter of obligation, than a determination that the company is worthy of attention.
This is an issue, that has, in one form or another, plagued Wall Street research for many years, and it's not clear when or if it can ever vanish. "Sell side" analysts are regularly accused of offering investment recommendations that are not wholly objective.
To some degree, this problem can be made manageable if investors approach it with open eyes. Nowadays, Wall Street has standardized on a five-tier rating scale. Terminology varies among firms, but the general pattern is (1) Strong Buy, (2) Buy, (3) Hold, (4) Underperform and (5) Sell.
When I look at this, I cheat. I read the top rating as a Buy, the second rating as a Hold and the third rating as a Sell. You rarely see much, if anything, in the bottom tiers. I doubt I'm alone in doing this. Consider what happens if a prominent analyst downgrades a stock from Strong Buy to Buy, or heaven forbid, Hold!
Subject to this sort of fudging, I believe that on the whole, analysts nowadays can ill afford to give too much bad advice to too many clients. There's a lot of competition in the field, institutional clients are very much aware of which analysts help them make the most opportune trades, and the analysts who are most highly regarded by institutional investors (who, themselves, are under considerable pressure to perform well) can earn huge sums. Concerns over side agendas may never vanish. But I suspect that the realities of today's market are producing far more sincere research efforts than may have been the case a generation ago.
This doesn't mean you should automatically run out and buy every stock that has a lot of Strong Buy ratings. Nor does it mean that any tiny internet micro cap that attracts Sell Side attention is interesting. But I do believe the efforts of brokerage house analysts can serve as a very valuable input into the data screening process. They can help identify which companies are worthy of individual study. And that, ultimately, is what every screen really seeks to accomplish.
Undiscovered Stocks
However useful analytic coverage may be, there is another viewpoint that can never be ignored. Mr. Jacobs went on to observe that "analyst coverage reduces the likelihood of discovering something that others have overlooked. The possibility of such market 'inefficiencies' makes up a large part of the justification for investing in microcaps in the first place."
Mr. Jacobs isn't alone. Peter Lynch, in his 1989 classic "One Up On Wall Street," observed "If you find a stock with little or no institutional ownership, you've found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you've got a double winner" (page 127). And this same idea was a key underpinning to the Lesser Known Stocks screen previously published on this site.
Consider undiscovered stocks a higher risk, higher return form of stock selection. Employment levels among analysts seem well above those of the past. So it is a lot harder to find companies that are uncovered due to neglect, rather than unfavorable assessment. And if you choose to dig into an uncovered company, you're pretty much on your own. There won't be any quarterly conference calls for you to listen to, or even read about after the fact. Projecting past performance into the future can be especially uncertain, because there are no analysts available to receive any "warnings" or "preannouncements" from management. And even if you don't like analysts' conclusions, their reports can at least give you a solid summary of non-quantifiable facts upon which you can base your own conclusions.
But the rewards you can get from being right will often be well worth the extra effort and risk you bear. This sort of digging gives you an opportunity to get in before the institutional community catches on and bids the stocks higher.
In the internet sector, the risk-reward tradeoff might even be tilted more in your favor. To some extent, it's a numbers game. Everyone, it seems, has heard of Yahoo, AOL, Priceline, Ebay, et. al. But stop a moment and ask yourself how many internet stocks you can name. Can anyone out there come close to 620? That's the number this week in the Market Guide database, and the tally is still growing. (So if you really like this sector and are tired of being lectured on why Amazon is worth $10 a share or less, you can say "OK, forget Amazon, let's go through the other 619 net stocks." That's a great conversation stopper.) However many analysts are actually out there, 620 companies presents a big workload and it's reasonable to assume some good ideas are falling through the cracks.
Besides big numbers, there's the sector story. It's one thing to find an uncovered company in a slow-growth or declining industry. In this situation, you could start by assuming the company is uncovered because it's uninteresting. That assumption may not hold up after further review, but you do have to start somewhere.
The internet is an infant-stage business that's likely to have a profound influence on the way humans interact, socially, commercially and professionally. Again, anything can happen after a detailed company study, but here, it's a lot easier to start with an assumption that the company has good prospects but analysts haven't looked because they haven't yet had a chance to catch up. In other words, in the net sector, it may be easier to adopt a "presumed innocent until proven guilty" mindset.
Screening
Below is a screen of uncovered internet stocks. I do believe that on the whole, analyst coverage can serve as a useful signal. But it is also interesting to see what's out there on the other side of the fence, the side that requires investors to roll up their sleeves and work a bit harder knowing they are on their own.
Obviously, the first part of the screen seeks companies that have no discernable analytic coverage. Bear in mind that this can be imperfect. It is possible that some companies on this list may, indeed, be followed by some analyst somewhere. But not every analyst submits estimates and recommendations to all the major tracking services that compile the databases used in screening. So rather than being a true zero-coverage list, view it as a list that is as close to zero-coverage as can realistically be compiled.
The 620-stock list was thusly narrowed to 230. I think that's too big for a case-by-case review. But if you want to see this group, you can download the full internet spreadsheet (covering all 620 companies) and sort on column AD, which is the one listing the number of analysts. Be sure to consider entries reading "0" (meaning the data services have information about the company and report no coverage) and "NA" (meaning the data services have no information at all).
To narrow the list, I went on to require QP/S ratios (price-to-sales based on an annualized version of the latest quarterly report) below 200. That eliminates the most extreme valuations while still stretching well into the high-value category.
I then imposed two requirements on sales. First, I looked for stocks that logged sales of at least $500,000 in the last quarter. That's low enough to catch companies that are extremely young, but it eliminates those that aren't really operational. I also required that consecutive quarter sales growth (a stringent test, often met only by high-growth firms, that can require enough secular growth to more than offset a transition from a seasonally strong period into a slower time of year) of at least 20%. That may not seem like such a tough hurdle for such new companies. But it really is a lot harder to post strong consecutive-quarter growth than year-to-year growth. Even within this emerging-company group, the consecutive-quarter requirement narrowed the list from 104 stocks down to a more manageable 35.
Here are the stocks that made the final cut.
Download an Excel spreadsheet (27K) for all 35 internet stocks in this screen.
Ticker Company Internet Group QP/S Ratio
ALIF Artificial Life, Inc. Software 41.76
ASTN Ashton Technology Group Software 56.63
AHWY audiohighway.com New Media 19.23
BIDS Bid.Com International E-Commerce 9.47
BIZZ Biznessonline.com Services 5.18
AMEN Crosswalk.com, Inc. New Media 5.05
CYSP Cybershop.com, Inc. E-Commerce 4.07
MED e-Medsoft.com New Media 20.34
LCTO El Sitio, Inc. New Media 94.92
EXTN Extensity, Inc. Software 12.56
FSQT FirstQuote Inc. New Media 16.78
GLXY Galaxy Enterprises, Inc. E-Commerce 1.25
HITT Hitsgalore.com, Inc. New Media 9.50
IENT iEntertainment Network Software 6.39
INDI Individual Investor Group New Media 2.08
KTWO K2 Design, Inc. E-Commerce 3.49
LNTY L90, Inc. New Media 22.54
LMKI LMKI, Inc. Infrastructure 64.49
LOAX Log On America, Inc. Services 24.93
NNCI NetNation Communications Services 77.04
PRFT Perficient, Inc. Software 19.17
SKIL SkillSoft Corporation New Media 5.45
SKYK SkyLynx Communications Services 5.87
SSOL Smartserv Online, Inc. Services 41.06
SPDE SPEEDUS.COM, Inc. Services 52.56
SNMM Starnet Comm. Intl., Inc. New Media 7.54
STOK Stockwalk.com Group, Inc. E-Commerce 2.43
TLXS Telaxis Communications Infrastructure 2.53
TLTG Teltran International Gr. Infrastructure 9.64
TSTN Turnstone Systems, Inc. Infrastructure 9.32
UVEW UniView Technologies Corp Infrastructure 6.09
VLST ValueStar Corporation E-Commerce 22.72
VTCO Virtual Technology Corp. Software 0.90
WEBB WEBB Interactive Services Services 149.38
WPNE White Pine Software, Inc. Software 15.02 |
