INFO--More -- see near for TEXN
Subject: Month-end Comments
Date: Sun, 24 May 1998 14:34:23 -0700
From: "mike king" <kingm@ccweb.net>
To: <Undisclosed.Recipients@esus.ccweb.net>
24 May 1998
Month-End Comments
Searching for Value.. Selectivity and Timing, as its not what you buy so much as when.
The Market is priced at its current level not because of anyone’s choice, but it isthe effect of the flow of money, which has to find a home. Choices are limited.
The market trades sideways. Market prices reflect all investors’ hopes and fears.
Bears think that stocks are so overpriced that the future is bound to be disappointing. Bullscontend that inflation is low, interest rates are low, raw material prices are very low ( the CRBindex made a new 4-yr low on May 22nd at 219.13. Last year it was 251.31) and labor pricesare reasonable, although this area is one of concern even to the bulls. The "quit rate", thepercentage of unemployed who leave their jobs without finding another, a very low number in times of prosperity when workers can tell their boss to "shove it," is a very low 10.7%. America has been able to attract the best talent in the world lured by opportunity. All of this is happening while business is brisk with personal disposable income at all-time highs.
Daimler Benz employs 300,168 to produce revenues of $ 69.92 billion while its U.S. counterpart generated $ 61.15 billion with only 121,000 workers.
Technical indicators are mixed. The advance/ decline ratio has been steadily worsening both on the NYSE and especially on Nasdaq. New Lows are exceeding New Highs for the first time since October. The Diffusion Index, a ratio of low P/E stocks divided by the high ones is reversing down. The GDP report Thursday will be important in telling us about Corporate profits foremost and the level of business activity and inflation for the 1st Qtr. Both the Implicit Price Deflator and
Corp profits should make good reading and retard any significant decline.. The market has levitated basis the Dow between 9,200 and 8,800. We continue to believe in DOW 10,000, a simple linear measurement of the decline period from August to February and want to buy a sharp sell-off. However, our readers know we often buy OEX 100 Puts on rallies.
While Indonesia has its problems, other countries, such as Ireland, with an annual growth rate of 8%, are on the verge of record economic performance. Europe is growing briskly, offsetting some of the retarding aspects of Asia. Meanwhile, the Nikkei may be coming to life as it made one of its better weekly closes at 15,801.65. The Taiwan Index looks the best to us of all Asia. At 8,384.91, it appears ready to move higher.
An area of concern has been the Transport Index. Low Transport stock prices reflect a view by investors that the level of business activity in 1999 won’t be so good. The Transport Index had gained 681 points from Oct 27th to April 16th of 3,686.02 but since has lost 295.43 points, ( 3,390.59 ) or 43.3%. All markets are entitled to retrace, however, either Transports are too low or the Dow is too high. The P-E ratio of the Transport Index is only 14.1. The Dow P-E is 23.4.
The S&P 500 Index P-E ratio stands at 28.08/1. A move above the highs ( 3,686.02 ) is necessary to confirm the Dow and S&P indexes belong at their present levels.
The index should benefit more from the low fuel prices. Last week, oil prices collapsed to their lowest level in 10 years, $ 12.50/bbl, partly because of a storage anomaly in Oklahoma.
At this juncture in the market with its high P-E Ratios, it may be prudent to use price divided by sales/share. The lower the ratio usually the lower the profit margins. Stocks with a low ratio in a quality group should be bought. Investors using this index have
outperformed the market the last 40 years.
Two companies in this category are Detroit Diesel ( DDC ) and Navistar ( NAV ). Detroit Diesel has a ratio of just .2846 and profit margins of 1.4%, while Navistar is at .36 with profit margins at 2.5%. Margins are at a low and stock performance signals an improvement to come.
Allied Signal ( ALD ) trades at 19x earnings of $ 2.30, compared with 22x for the average participant in the Dow Industrials. Another measure we look at--- the P/E ratio divided by expected five-year growth rate--- comes to 1.2 vs 1.6 for the average Dow stock. Also they are very liquid with $ 1 billion in cash and $ 500 million expected from cash flow this year. The 52-wk range has been 31 5/8 to 47 9/16. The price/sales ratio is 1.685, not as low as the others, but
Allied is a much larger company.
What do the three companies have in common? They have been customers of Turbodyne ( TRBDF ). Turbodyne has rallied from $ 2.00 a couple months ago to $ 10 1/16.
Our readers know that we began recommending TRBDF over a year ago at $ 4-5.00/sh.
They had entered into one of those treacherous Preferred Conversion Agreements but fortunately cancelled it in the nick of time and has since outperformed the S&P even though the company has
lost money every quarter and is just about to break even. The stock trades on the basis of its technology and "market share."
Turbodyne has a patented technology that enhances the performance of combustion engines while reducing fuel usage and pollution. Turbodyne was officially certified by the U.S. Environmental Protection Agency under the Urban Bus Retrofit/Rebuild program. The company received a
purchase order from Detroit Diesel to retrofit transit buses nationwide.
In addition, Turbodyne is the only selection by the United Nations Flag technology for worldwide application and has received requests from over 57 countries for air quality improvement programs.
Turbodyne has 36 million shares outstanding and sports a market cap in excess of $ 300 million.
However, the market potential is huge with over one billion vehicles existing worldwide and 50 million new vehicles produced every year. In addition, production of diesel engines grew from 11
million in 1996 to 17 million in 1997.
The Airlines are another group, which falls in this category. American Airlines ( AMR ) our
favorite, trades at $ 150.44. Sales are $ 215.54/share, which equals .698 ratio. UAL stock trades
at $ 80.68/sh. When divided by $ 197.23 sales per share, the ratio stands at .409. Delta’s
Price to sales ratio is .6077. The Delta price came exactly to the 200-day M.A. Continental’s numbers are $ 57.75/ $ 121.93 which equals .4736, while Reno has the lowest ratio .2144, with a stock price of $ 7.78 divided by sales of $ 36.28 per share. Reno lost $ 1.51 the last year. The 200-day M.A. comes in at $ 6.75, where we wanted to buy but the stock has held well at the 50-day M.A. of
$ 7.75. The longer it levitates in this pattern, the better the buy.
Oil stocks treated us well, especially Elf Acquitaine ( ELF ). Short term traders may want to take profits on any further strength, in the 73-75 area. We had originally recommended in the low 50’s. Same with our other favorites: BP,RD and ENI SPA. They have out performed the Domestic Integrated Oils and will continue to over the next few years. Also take profits on CHV and MOB.
Other recommendations:
Graco (GGG), MPW Industrial Services ( MPWG ) Twenty-First Century
Technologies,Inc.
( TEXN ), Applied Voice Recognition ( AVRI ).
Graco, was first recommended by us a year ago, trading below 20. It has a repurchase program
buying back 5.8 million shares at high levels. We like the action and management.
MPW trading around 11 « is in the industrial cleaning and facility support services business.
Growth continues at a 25% rate.
Twenty-First Century Technologies Inc., ( TEXN ) is an Over the Counter Bulletin Board stock
trading at just 17 cents, whose earnings are about to happen. TEXN is one of the only users of
radioactive Tritium in the U.S. Their night-sight business is exploding.
Applied Voice recognition is acquiring medical dictation firms and enhancing them with its
automated voice to text methodology. Trading at just 1 « to 1 _, it represents outstanding value.
We continue to like all the Retail and Consumer oriented container stocks mentioned the past
several weeks. Personal Disposable Income will continue at a monstrous clip.
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