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Technology Stocks : THREE FIVE SYSTEM (TFS) - up from here? -- Ignore unavailable to you. Want to Upgrade?

To: John Morelli who wrote (1711)	6/8/1998 6:06:00 PM
From: Noblesse Oblige	Read Replies (1) \| Respond to of 3247

Hi John... For a fund to be comfortable holding a small six figure position in this stock, daily volume would have to be at least 50,000 shares. It hasn't been that high in ages. You have also asked why TFS would do an offering when it has available lines of credit. For a variety of possible reasons: 1) The company has traditionally had a very low financial risk profile. I doubt they would actively want to change that. 2) There is very large dependence on one customer. If the company was into the banks for cash, and a problem developed with that concentrated a customer, it could lead to very serious liquidity problems that might prove to be truly traumatic. This most probably isn't a reasonable risk to take until there is more substantial customer diversification. 3) The increased number of shares out following an offering adds to liquidity, interest, and has as a byproduct (at least from the investment bankers) additional analytic coverage. John, I am not sure what represents the most important issue to the company, but from my own perspective, item #3 is exceptionally important. Analytic coverage is currently minimal for TFS, with only 4 analysts publishing on the stock to my knowledge. Cihra at Furman has the highest visibility, but a miniscule following. Peacock is a local Phoenix firm, and covers the company because it has a few large brokers with an interest. HD Brous is another local firm, but often appears behind the curve on TFS. Moreover, it doesn't have much of a "following" in the stock. Lastly, the Red Chip people are well known, but have assigned an analyst to TFS who appears to be a specialist in a different industry. All in all, collectively there is minimal impact on the market price. Eventually, TFS will have to find someone with a little more "clout" to communicate the "sell side" material to the "street." It is an important missing piece to the valuation puzzle, but assuming TFS does a decent job in selecting joint underwriters for their deal later in the year, this is an easily resolvable problem. Having said that, John, you obviously known that it shouldn't be a "resolvable problem," because there was no necessity for it to get to that state in the first place. Doing the offering will certainly help, as follow-up research is a requirement for the underwriters. However, most of Wall Street downplays the importance of research from investment bankers, feeling (not always unfairly) that advice rendered from an interested party isn't arms length. Nevertheless, it is better than "close to nothing." I guess we will see in due course. There is nothing that would help TFS as much as putting up good numbers while simultaneously announcing that it has new production orders from a non-Motorola cell phone manufacturer. You may think that is "pie in the sky", but if the company actually hits my earnings targets for quarters 3 and 4 and diversifies away from MOT being half their business, my own view is that the stock would double from its current trading level. And, it would do so very quickly. In time we will know. I hope the above has been helpful.