*AV* RadarView Vol 2 Issue 2
Apparently I have exceeded my daily email allowance even though it is the next day. So, here she be.
OPENING COMMENTARY FOR OCTOBER 20, 1998
We had a good day in the market prior to Super Earnings Tuesday with some of our favorite stocks reacting rather well. The DOW finished up +49.69 while the NASDAQ recorded a 27.78 gain for the day. This is a continuation of the mini rally (or Bear trap) from last week. I am still extremely cautious and would be very careful about protecting any profits that are being generated over the past few days. At the very least, I would encourage tight controls on lower stop limits to ensure you do not see any of the profits slip away. As long as the stocks are performing, give them some head room to move up but keep those lower limits moving up also.
Of particular interest to us on this fine Super Earnings Tuesday are the following companies that will be reporting earnings. From the looks of price activity yesterday, we are anticipating some nice numbers. However, I caution you about the History/Mystery Theorem of stock price activity when earnings are released.
IBM-LEVL-MSFT-RFMD-TXN-AEIS-ASYT-SGI-DPMI-EGLS-ERICY-GTW-LU-MCHP
With the market moving higher yet yesterday, it suggests continuing strength that may last a while longer, especially if the big guns like MSFT and IBM can surprise the high expectations of this market. Most of the major indices are obviously trending in an upward direction that implies further strength. Historically this is more often followed by a blow-off of proportions relative to the gap up that has occurred since the recent lows.
The upward movement of the broadest indices, (Russel 2000, Midcap, Value line) does indicate the market's strength and indicates the market may be improving or solidifying its base. Therefore it seems sustainable in the coming week, especially if more good news will be forthcoming. A correction will no doubt come out of nowhere, somewhere in the near term. The NASDAQ could recvoer to the 1750-1800 range, but probably no higher.
We seem to be experiencing the direct opposite effect of the precipitous decline in the stock market whose negativity seemed to feed upon itself, compounding the severity of the decline. The tech sector, for example, was severely overextended on the downside, making part of the current positive reversal seem almost unstoppable and sustainable. Sort of a Yin and Yang to the rise and fall. In the case of the tech stocks, there is no real solid foundation for this recent run up other than maybe a natural reaction to the oversold conditions, in general. Anyway, the rebound has become equally and just as intensely compounded by the number of stocks that are now in a large recovery mode as seen by some of the buying frenzy.
With the remarkable rise in the indices (especially the DOW) last week, we could conceivably close in on 9000 again, while the drop in oil prices yesterday, could give the DOW industrials a much need lift. Usually following a record weekly
up-move, prices tend to move much higher. The last strong move coming off a sharp bottom occurred in April 1997 and October 1997 when interest rates started falling. In each case, there was a significant recovery in the tech sector and this time it looks to be no different. At that time, the market proceeded to embark on a three month run up that included record up-days, up-weeks and up-months. So, as a contrarian view to my opening remarks, it may pay to be prepared for unexpected upside surprises. The extremely oversold conditions of most of the tech stocks and the probability that a number of these stocks could be involved in short squeezes or merger rumors, the possibility of an artificial run-up cannot be ruled out.
Enough theory since a great deal of this really depends on today's much heralded and anticipated earnings announcements and how the market chooses to react to them. In either case, I would expect some sort of volatility.
TIMELY TOPICS
ASYT(6-7/8, +1/4) - is trading at less than actual cash value these days. Even though it may be slow to recover, it is an exceptional bargain within the industry. They have a great future WHEN the 300mm programs are implemented since they are designed into most of them. They will also have some real good business opportunities as the existing fab infrastructures become obsolete and are replaced starting in 2000 and beyond since they also sell OEM components like integrated indexers to most of the major 200mm equipment suppliers.
BRKS(9-7/8, +5/8) - is not to far behind ASYT and is in the same business segment as ASYT. They have actually been performing a little better than ASYT, price-wise.
I would not be surprised, nor would it be that far fetched, to see ASYT team up with either BRKS or PRIA to become a real powerhouse for when the sector recovers.
VAR(37-1/2, +2) - they actually made the scan list but I did not want to put a +2 gainer into the RST Section today since it more timely. VAR announced awhile ago, that they were breaking up into separate business entities. I mentioned this before but it seems to have gone completely unnoticed by Wall Street. Today's action might be a glimmer of what is to come since I think the sum of the parts are going to be worth more than the whole. Therefore, like the ATT breakup into LU, T, and NCR, I think VAR could break up into its pieces with a combined value greater than it present stock price.
INTC(85, +1 ¼) - will buy Shiva Corp., in a cash deal. This will more than likely upset the shareholders since the price will be $6, which is a 33% premium over Shiva's present stock value. This price is nowhere near the price paid by many of the shareholders who probably paid between $8 and $14 for their shares just this past June or so. Intel pay $182 million for Shiva as part of INTC's plan to expand its
networking-product line. SHVA closed at $5.50 and was up $1.25 for the day. There is still a 10% gain to be made if the deal goes through. Personally, I think the deal may go through but there may be some hard fought negotiations initiated by the shareholders or a competitive bid in the $7-$7.50 range. Just a thought.
zdii.com
COMS(32, +13/32) - COMS shares have been riding a $23 to $30 roller coaster since early June and there has been some recent optimism that earnings are about to turnaround. COMS could trade up to the $36 - $40 range over the next year relative to its current fundamentals and earnings which have been estimated at $1.38 for the 1999 fiscal year which ends in May of next year. However, with the recent acquisitions taking place, along with capital infusions, I would not be surprised to see COMS become a takeover candidate. INTC becomes less likely as we move forward, but they should not be discounted. My bet for a rumor would be LU who recently had their "acquisition handcuffs" removed due to the ATT breakup. The rumor mill seems to like the nifty $50 price figure as a fair take over price for COMS, which just about matches its 52 week high. At $50, we are looking at a nice profit over the next year from present levels.
SHWB(45-3/4, +1/16) and EGRP(15-13/16, +3/4) -- Morgan Stanley Dean Witter
lowered its rating on SCH to neutral and I made a case for taking profits in EGRP yesterday. We have made some nice gains in these stocks and it seems appropriate to move on to greener pastures. Both have now reported their 3rd quarter earnings which should have been real good, considering the volumes traded on this past quarter. I think we will see some settling down for both of these online brokers this quarter. This is supported by the herds of brokers being laid off at the major houses recently. There may be a move the these online providers but I still think we will have a slower 4th quarter. There are those that believe EGRP is in worse shape as a slowdown in online trading occurs just as it completes its very costly marketing and hardware programs. chkpt.zdnet.com
news&doc_id=ZE203156&pic=Y
ASND(47-7/8, +15/16) - another rumored takeover target of LU reported Q3 earnings of 32 cents a share, beating the 31 cent estimates. Earnings rose 12 cents a share from a year earlier.
Earnings estimates were raised for IBM for both the 4th quarter and fiscal year 1998 by Soundview Technology Group. Raised Q4 1998 EPS estimate raised to $2.46 from $2.36, FY98 EPS estimates raised 10 cents to $6.56 from $6.46 but FY1999 estimates were not changed. Many people believe IBM will top analysts' forecasts when it reports Q3 earnings today.
BRYO may invest significantly in its recently announced relationship with IBM, which should produce a solid flow of prospects and subsequent revenue streams.
According to industry analysts., Intel's $500 million stake in Micron Technology is a long-term bet that could lead to a big payoff once the memory market comes out of its downturn.
RST SCAN LIST COMMENTARY
EGGS(8-11/32, +2 31/32) - EGGS has been under-followed by the major brokerages and was a massive issue for many investors that got caught in the July/August run up from the $9 to $10 range to just under $30 before it collapsed just as fast to just over $4. It has steadily tried to fight back and has been the subject of many day trading plays with limited success. This was a small positional play that looks to have finally paid off for some investors. They will report earnings today but there are no real earnings estimate, again to lack of adequate coverage. EGGS closed all of its retail stores and transitioned over to an online organization, mimicking the successful approach by Amazon.com. This transition to the on lime business model wreak havoc on revenues. They also suffered losses in the previous quarters as the new business model was implemented. It is conceivable (but still a bit risky) that EGGS could make this transition to E-commerce an economic success. During all the chaos in converting from retail outlets to on line sales, EGGS did experience a 41% growth in on-line orders and a 50% increase in the number of visits to its website. It also looks like their on line auction site is picking up some steam. Whether they can go head to head with ONSL and EBAY is still yet to be determined. I would not be too concerned about this since the long term strategy is geared more to becoming a major on-line retail enterprise, using software and computers as their entry into the E-commerce sector. Down the road is anyone else's guess as to where they may venture. I just hope they do it very slowly and cautiously as not to repeat the mid year price debacle as they bring these services on board.
ADPT(10-11/16, -11/16) - Board of directors authorized the repurchase on the open market of up to $200 million worth of the company's common shares outstanding. This goes hand in hand with the re-pricing of the company options that will be priced on Wednesday. It also makes real good business sense when you consider the 100s of millions of dollars they have in the bank. They are already have over $750 million banked, I think. There is no other better investment for them than to invest in themselves to this extent. Any recovery in their price will yield much higher returns than having it effectively sit idle. Lowering the number of shares in the float will make it much easier to be acquired by one of the "big boys". Yes, I believe that after their failed attempt at buying Symbios Logic, their getting rid of their CEO, going back to core strategies and businesses of the past, and shutting down non strategic businesses and programs, ADPT is trying re hard to either make a very well orchestrated turnaround in their business for future successes OR they are doing everything necessary to make thmeselves attractive to a suitor, down the road. With all the recent merger announcements and rumors, I think ADPT could be a target because it is attractively priced and it has CASH. Adaptec has about 113.6M shares outstanding as of the beginning of this month and this buyback represents a significant percentage of the outstanding shares.
PAIR(8-15/16, +7/8) - this was mentioned yesterday and performed real well today. We spoke of the Bell Atlantic venture into DSL and I thought a small follow up that I came across: Consumers may move a step closer toward high-speed Internet access in the home, as a preliminary standard for digital subscriber line modems is expected to emerge from the International Telecommunications Union by the end of the week.
news.com
TLAB(47-7/8, 2 15/16) - there was time to participate in this run up yesterday since it was only up 3/16 at the open. Therefore 2-3/4 points were there for the taking today based on our analysis. This is still a positional play but made a nice day trade for some. TLAB Exceeded 3Q Expectations with a 34% increase in revenues ($424M), and EPS of $0.49. In addition to this they have a record backlog going into 4Q98. We still have not heard about the Sprint ATM gateway announcement. The only downsides were the TITAN revenues miss and some creative ways of looking at the revenue numbers. If you remove the $21 million in Coherent revenue and the $12 million in the upsided service revenue, TLAB's base revenue of $390M was close to being flat with 2Q98, giving them a growth rate of only 26%, which would be a 2 year low. But in the present market environment this does not concern me too much. I wonder if Tellabs' good news helped Ciena jump 2 3/8 to 11 11/16, a 25% gain. Ciena cratered as the Tellabs planned merger disintegrated last month.
SLVN(27, +1 7/8) - for those loyal readers, you will recall that SLVN became a positional play somewhere around $21 with the premise that the Summer months of kids out of school were not kind to their balance sheet. We stated that as school aged kids returned to classes, this part of their business would get back on track. At $27 today, we have met all the profit objectives we were after so profit taking should be considered or at least steps should be taken to protect those profits in the event of a reversal. Greed is good at times but protecting profits should always be the most important thing. Slow but sure winds the race here. CS First Boston has SLVN as a strong buy, for what it is worth. According to CSFB, in a recent visit with management, Sylvan's dominant position in the computer-based testing business
is expected to be reflected in 3Q operating results, with this division's earnings expected to jump 60%+ on a similar gain in revenues. This is a high growth market and their is no evidence that any serious competition exists at the moment. In the education sector, Sylvan is focused on acquiring large and growing niche education businesses with attractive margins, and high barriers to entry, thereby going after only those deals that are accretive to near-term earnings. CSFB expects near-term earnings to be roughly 50% for Q3, an acceleration of its growth achieved in the first part of 1998. I am still bullish on this company but recommend protecting profits with some sort of lower limit strategy and letting this run a little longer, if possible. SLVN is my favorite name within the education sector as my daughter attends some of their enrichment programs. As long as I have mentioned CS First Boston, I should mention that they have rated it a Strong Buy based on "a combination of an attractive collection of dominant business franchises, strong management execution, and a favorable industry environment." They expect a 35% EPS growth rate and a 12 month price target of $42, based on a P/E in line the projected 35% growth rate. [1999E EPS of $1.20 (35 x $1.20 = $42)].
SUNW(50-3/4, +1/2) - hardly worth mentioning but they did report strong EPS of $0.50 on $2.5B which exceeded expectations. Orders grew by 33% from last year.
They look solid and have fared pretty well in this market so far.
CS(9-1/16, +1/8) - unfortunately it made the list and I am obligated to give it space here. This was a favorite of some boiler room types at the low $11 levels and made a quick bee line for the single digits not too soon after. My wife does not think too highly of their products and she is a Systems Administrator who supposedly knows her stuff. She was not to impressed with the information I shared with her on new products either. This past Friday, CS received notification from the SEC concerning its accounting treatment of two acquisitions. As a result, it is reducing the amount of
previously recorded acquisition write-offs. CS is restating its Q2 and Q1 EPS to reflect these accounting changes. CS expects that these changes will add between $2-4M in operating expenses related to additional goodwill. You are on your own with this stock.
BEAS(19-11/16, +3/16) - company still looking fairly solid, no real softness in customer demand even amid the global economic crisis and spending pressures.
ASPT(12-11/16, +9/16) - this became a positional play last week and has provided some amusement for the day traders I converse with. ASPT announced its board of directors had authorized the repurchase up to 5 million shares (about 10%) of the outstanding stock with no time limit set. The stock collapsed last week and this was a speculative gamble for a minor recovery. Aspect has $206M in cash and can handle the repurchase without any difficulty.
FROM THE RADAR ROOM
LRCX(10-5/8, +21/32) - is becoming financially attractive selling at close to 1X yearly sales, 0.50X book and close to 1.5X cash value. Not one of my top contenders but it is hard to disregard these numbers.
MTSN(3-1/8, +1/16) - trading barely above its 52 week low and $10 off from its 52-week high, they are valued at close to 1.3X yearly sales, 0.60X book value and 1.4X cash flow. They are struggling and I would not be surprised to see them as a takeover target at these prices. However, if the downturn gets anymore protracted, they could just as easily become a casualty of this downturn, making it even more attractive to one of the more solid equipment companies with free cash or stock.
DPMI($21)NVLS($28)PLAB($12) were trading at roughly these prices just a week ago. Now look where they are at. DPMI($25)NVLS($34-3/16)PLAB($13)
Both PLAB and DPMI were hit harder than they have historically, making these the odds on favorite to recover faster than the rest of the group. On a percentage basis. Raw silicon provider WFR has made a monumental move form 3 to close to 7 within a matter of a few short weeks.
KLAC(27-5/8,+13/16) will lead the charge in equipment sales, early in the recovery since they will be dealing with yield-enhancement equipment from the KLA side of the business. The recovery from this downturn in the tech sector should be led by CMP, Copper processing, automation and lithography as the enabling technology leaders. We will report on those companies involved in these arenas as we move forward. However, with the push-out of 300mm processing, automation should fall to the bottom of this short list. Copper technology seems to be the most aggressive of the group being studied and being worked on during this downturn.
MARKETWATCH.COM, INC. (IPO registration filed October 13) Proposed Ticker Symbol: MKTW ipocentral.com
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