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Technology Stocks : Y2K (Year 2000) Stocks: An Investment Discussion -- Ignore unavailable to you. Want to Upgrade?

To: Kathy Riley who wrote (10598)	4/1/1998 8:17:00 PM
From: Narotham Reddy	Read Replies (2) \| Respond to of 13949

Y2K Focus: A Clear Line Is Drawn Daily commentary updated for April 1, 1998 Briefing.com began covering the Year 2000 marketplace just seven months ago. At that time, we developed a universe of 42 stocks (2 have since been acquired), all of whom had at least some part of their business focused on solving the Year 2000 problem, which is the inability of a system to accurately handle dates after the year 2000. We divided the stocks into roughly four types of companies: 1) "pure" Y2K companies, whose business is solely devoted to solving Y2K problems, either through software or services (e.g. Peritus); 2) systems integrators, companies in the business of building complete computer systems for corporations (e.g. Keane); and 3) software tools companies, in the business of all types of software development or testing tools (e.g. Intersolv); and 4) computer companies, manufacturers of hardware and software (e.g. Unisys or CA). It was widely believed last year that an incredible amount of money would be spent by America's corporations in solving this problem. In fact, the Gartner Group estimated that an incredible $600 Billion (that's billion), would be spent It seemed like a bonanza in the making and companies of all sizes were focused on a variety of solutions. With only 40 companies focusing on the problem, wouldn't they all be good investments? As word of the Y2K problem got around, interest in the stocks grew, and the pure Y2K stocks in particular developed huge market capitalizations based on little or no business history. On November 5, 1997, we did a complete research study on the fundamentals of every company on our list. Our intent was to look for signs of bulging revenue and earnings. After all, we reasoned, if the size of the problem really was as large as $600 Billion, it would surely start to show up soon, and not overnight. Our study produced an unintentional but clear conclusion: the Y2K money appeared to be heading for "systems-integration" companies, not at the so-called "pure" Y2K companies. We recommended four companies at that time for Y2K investors: Information Management Resources (IMRS), Complete Business Solutions (CBSL), Mastech (MAST), and Keane, Inc. (KEA). In February, we repeated the same fundamental study. Not only did all four of the above stocks continue to show signs of bulging revenue and earnings growth, but four more systems-integration companies were added: CIBER (CBR), Syntel (SYNT), Whittman-Hart (WHIT), and Computer Horizons (CHRZ). And what about the "pure" Y2K stocks? The pure Y2K companies just haven't shown the expected explosion of revenue and earnings, even though they have grown. The severe collapse in the stock price last week of Peritus Software, off more than 60% in three days, only underscores the conclusion we came to six months ago: there is a Y2K problem, but the pure Y2K companies are not going to be the major beneficiaries of it. The market certainly has reached the same conclusion. Here, in a reduced form are the stock charts of the four systems integrators we picked on November 5, 1997, along with charts of four "pure" Y2K stock companies, Alydaar (ALYD), Peritus (PTUS), SEEC (SEEC) and Data Dimensions (DDIM). To view any of these charts in full size, just click on them. Charts of the November 97 Briefing.com Y2K Stock Picks Charts of the "Pure" Y2K Stock Companies Since November 97 What now? We don't think there will be any significant change in the Y2K landscape. The systems integrators are likely to continue their explosive growth pace for the foreseeable future. But the Y2K investment opportunity won't last much longer. Readers looking for a Y2K play that followed the lead of our November 1997 Stock Brief and are still holding are in the best position. All four of the November picks have nearly doubled. (IMRS has nearly tripled.) With healthy profits built in, those investors can afford to wait for further developments. The best strategy is probably to wait until a downturn in revenue growth shows up, but not add to current positions. You may wind up selling just after the top, but your profits will be solid. New investors looking for a Y2K play should realize that they are coming into the Y2K game late. The main question facing the systems integrators is whether they can maintain the current growth explosion without the turbo charge of the Y2K problem. And it is still too early to answer that question. Holders of the "pure" Y2K stocks have the hardest decision of all. We will try to help them in tomorrow's Stock Brief with a review of what went wrong, and what we think the future holds for the pure Y2K stocks. [ Index ]