Correction: The link will not work. Read the article here.
Sheesh...Talk about copyright issues. I just noticed something very interesting. It's been a long time since I placed any officially published material on an AOL web page. Looks like AOL has 'bots scanning member web directories to find fully copy-and-pasting jobs of copyrighted material -- cases where a full web page is posted, as I did, never mind the fact that I was the author, and that I can permit reprints on a selective basis. Either this, or AOL's member web space might be down right now. I can't tell. Oh well... It would be understandable why AOL would send 'bots out after content like that.
Anyway, here is the full text. Again, this is one of my "Tech Stalker" journal entries from Money Central's "Strategy Lab"
investor.msn.com
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Journal: March 5, 1999
• Dialogic (DLGC): Enter order to sell half of position (100 shares) at 38 7/8; order is good until canceled.
• BroadVision (BVSN): Enter order to sell remaining position (200 shares) at 58 1/2; order is good until canceled.
• Alpha Industries (AHAA): Enter order to buy 300 shares at 15; order is good until canceled.
• FVC.com (FVCX): Enter order to buy 200 shares at 11 1/4; order is good until canceled.
• Photronics (PLAB): Enter order to buy 150 shares at 18; order is good until canceled.
• MMC Networks (MMCN): Enter order to buy 500 shares at 10 3/8; order will expire on the close of trading Monday, March 8.
• TranSwitch (TXCC): Enter order to buy 200 shares at 27; order will expire on the close of trading Monday, March 8.
***
Ah . . . back from Mexico, where I spent a much-needed vacation! What do I find now? For starters, there's been an enormous amount of news surrounding companies I hold in the Tech Stalker portfolio.
Furthermore, ever since Dell Computer (DELL) disclosed slower-than-expected revenue growth, pockets of the hardware segment have been under extreme pressure. Some of the smaller companies in this segment have been taken out and shot, but large capitalization companies are reeling as well. Even media pundits are getting into the game, talking about how fast the technology sector turned, how buying related to installing Y2K-compliant systems is over and how we're probably staring down a long, hot summer. Thursday's bounce in technology is ironic -- right when the pundit drumbeat of how technology is flushing down the drain was picking up volume.
High time I add a little perspective on all this! In this journal, I'll address what's going on in the hardware segment, tying it into technology overall. I'll also discuss some of the big news events that are relevant to stocks I hold in Tech Stalker, and I'll throw in a few trades -- what a deal. Bear with me: This is going to be a meaty journal.
Hardware: Seasonal, not cyclical, slowdown
The hardware segment correction can be seen quite clearly in semiconductor, semiconductor capital equipment, computer and networking companies. 3Com (COMS) offers a timely example in the networking segment. No two ways about it: The company serves a more commoditized segment of the industry, where pricing pressures are extreme in modems and network interface cards. Wall Street has, in fact, used the company's troubles as but one more indication that the hardware industry is slowing down. The company held an analyst conference this week, indicating that management was unclear on the degree to which an industry slowdown might be taking hold.
I don't believe we are upon any such slowdown. Pockets of the networking industry are hitting potholes, to be sure. But the situation is analogous to how Dell now finds it more difficult to grow revenues, given that stealing market share is no longer achieved easily. The top five PC manufacturers now control about 60% of the market, and competitors finally are getting their direct sales models up to speed and more like Dell's. Toss in the fact that component prices are not falling like they used to (Dell's quick inventory turns helped to increase revenues given the ability to quickly buy and sell components that kept dropping in price), and it suddenly becomes clear that the environment in which these competitors slug it out has changed.
PC manufacturers have reported slower sales levels recently, but some of this slowdown is to be expected -- a seasonal phenomenon. The situation is made worse by Intel's (INTC) product transition to the Pentium III. The new chip was delayed by about a month, and consumers typically wait out a product transition like this. Still, pundits continue to grasp for straws in an effort to explain what is going on. Particularly suspect are claims that strong PC sales in 1998 were due in large part to the Y2K problem, with some pundits developing expectations that 1999 sales now no longer will be driven by a last-minute rush to upgrade systems. This simply isn't true. Addressing the Y2K problem will result in an incremental increase in PC sales throughout much of 1999.
In the final analysis, does the recent news tell us that the end market for PCs is undergoing a significant slowdown? No! Again, we are witnessing a seasonal trend, and the slowdown has had a direct impact on expectations. Expectations swung too far toward the bullish camp coming into this year, and stock prices are now in the process of over-contracting as expectations come down to earth. Inventory levels in the PC industry now are down to about four weeks' worth of product in the distribution channel. This is a significant improvement over levels seen in previous Intel product transitions and during previous seasonal slow-downs.
When expectations swing wildly, investors can profit. These periods happen to mark the best points for accumulating shares in the broadly defined hardware segment. In the coming weeks, I'll be positioning the Tech Stalker portfolio to exploit these dynamics.
Moving further up the supply chain, it is also clear that the rebound in the semiconductor industry is fully in place. Manufacturing capacity is just as important as end-market demand, and given where the memory and microprocessor markets now stand, making the case that we are only in a seasonal lull is pretty straightforward. Furthermore, the case for communications end-market focused semiconductor companies remains as strong as ever. As I hunt for potential long positions, I'll be paying particular attention to bandwidth-related semiconductor companies.
I own 3Com in my Tech Stalker portfolio. I'll address the company's situation in more detail in subsequent journals. Suffice it to say, the problems at the company are real, but I believe the stock is more fairly valued in the low $30s now (lower than I had believed previously, but above the knee-jerk reaction of Wall Street).
Exploiting the technology sell-off
Alpha Industries (AHAA) sold off significantly this week, in what appears to be the product of weak hands all exiting at the same time. The company issued a press release late yesterday, indicating that earnings per share will meet analysts' estimates for the March quarter. I now consider the stock significantly undervalued. The shares should be trading in the $20s, nevermind the fears investors have about totally unrelated hardware end markets. Today, I'm entering a "trolling" buy order for another 300 shares at 15. This order is good until canceled.
Photronics (PLAB), the maker of semiconductor photomasks, has been hit hard in the recent technology sell-off. The fundamental story I outlined in previous journals remains fully in place, however. I am entering an order to buy an additional 150 shares at 18. If the stock keeps declining, I may buy more.
FVC.com's (FVCX) decline is analogous to Alpha Industries'. The business prospects for FVC.com have only strengthened in 1999. The sell-off is unjustified and I want to add to my position -- at a price. I'm entering an order to buy 200 shares at 11 1/4. The order is good until canceled. It's one of my “trolling” buy orders -- if it executes, great. I want to be ready for any pullback linked to volatility alone, but I'm happy with my current position.
MMC and TranSwitch: On the off chance . . .
Talk about lousy timing. As I prepared this journal entry, I saw Intel's buyout of Level One Communications (LEVL) flash across my screen -- just as I was getting set to enter a buy order for Level One! Well, tough luck. I have an idea that has a slim chance of working, however. Before the open, I will set an order to buy 500 shares of MMC Networks (MMCN) at 10 3/8 or better. I will also set an order to buy 200 shares of TranSwitch (TXCC) at 27. These orders will expire on the close of trading Monday, March 8.
Why am I doing this? I think there's a chance some traders are going to totally misinterpret the Intel news. Across the communications chip niche, we're going to see a clash of forces in today's trading. Some traders are going to be fearful that Intel is making a concerted effort to enter this space. Others will see Intel's move as a validation of the valuation many stocks in this segment command. Both forces will counteract, pushing stocks lower and higher, respectively.
I want to position buy orders to exploit the off chance that traders are foolish enough to see Intel's takeover of Level One as a negative for MMC Networks and TranSwitch. MMC Networks has very little product overlap, but the stock could still take heat if the force of fear wins out today. Similarly, TranSwitch is highly focused on wide-area networking, developing chips for SONET and ATM, telecommunications protocols that have no overlap to the enterprise networking field in which Intel is making a move.
I don't have a clue if these orders are going to pan out, but I can't manage this portfolio in real-time. So, though my crystal ball is cloudy, I do know what I would do if traders get silly today: Buy!
There's no mystery why Intel is going after Level One. Level One is a leader in the very networking market segments in which Intel participates, and both companies have had a partnership for some time now. Galileo Technology (GALT) has some overlap with Level One, but Galileo is more focused on switching cores used in Ethernet. I would view any excessive heat on Galileo as unjustified.
PMC Sierra (PMCS) is building a presence in enterprise networking, but I would view excessive heat on PMC Sierra as unjustified as well. In fact, if Intel is really serious about getting into communications silicon, seeing the microprocessor giant buy PMC Sierra within the next two years would not surprise me.
Applied Micro Circuits (AMCC) is another stock to keep an eye on today. It is also heavily focused on the wide-area network and not the area into which Intel is making a strong move. I'm going to leave my sights on TranSwitch and MMC Networks for now, however.
Xylan: Alcatel finally bites the bullet
This week, Alcatel (ALA) announced it will buy Xylan (XYLN) for about $2 billion in cash. Last week, rumors of this deal percolated through the market, based on comments from Xylan's management, noting that it was now open to the idea of realizing “shareholder value” through a takeover. Throughout the closely held company's history, management has not had this orientation, so this was all Wall Street needed to hear. The Alcatel rumors began to fly.
In the week prior to all this commotion, I set my limit order to sell my option stake. I opted to leave this order on last week. Given the time lag in managing the Tech Stalker portfolio, I only had one day where I could have made a journal entry to cancel the order prior to its execution. I decided to sit out the trading session. Wrong move!
I knew all along that I ran the risk of leaving profit on the table by setting a limit order very early, so there's no sense in crying over more than $12,000 in spilt milk. There was no way of knowing for sure that the rumors would prove true this month. Rumors like this have surfaced periodically, and under the gun of an expiring contract, I rolled the dice and opted to leave the order on.
I still own 100 shares of the common stock. Since this is a cash tender offer beginning March 8, and since I am in no need of cash at the moment, I'm going to let the common stock position sit for now. I will either close the position out with a trade in about a week, or tender my shares for $37 -- Alcatel's offering. I have full confidence that this deal will close. Holding onto the common right now entails very little risk.
I'm very selective in my options purchases in Tech Stalker. During Rounds One and Two, I have only purchased three contracts, and each generated huge gains. I buy these positions not so much for momentum reasons, but rather to exploit situations where the degree of undervaluation is nearly as large as the prevailing risk level in owning is small. In English: Downside to an extremely aggressive entry in Xylan in the mid-teens was limited.
Stay tuned. The hardware segment, including many semiconductor stocks, is going through an excessive correction right now. I may add option contracts in this space soon.
Dialogic: Microsoft gets cozy
This week, Microsoft (MSFT) announced it will license Dialogic's (DLGC) CT Media server software, and the software giant will buy a 5% stake in Dialogic. Dialogic is going to issue 860,000 new shares for about $28.14 a share. I can't say I'm surprised by this news. Microsoft and Dialogic have always had a strong relationship, and Microsoft has always been very keen on supporting Internet protocol telephony applications making use of the Windows NT platform and servers in general. (Editor's note: Microsoft is the owner and publisher of MSN Investor.)
On the open, I will enter an order to sell 100 shares of Dialogic at 38 7/8. This order is good until canceled. If the order executes, I will have trimmed my position down by 50%. I'm only willing to part with the shares at a healthy profit -- hence, the 38 7/8 target. If the sell order executes, the remaining position is appropriate for a long-term holding in the Tech Stalker portfolio. I may “range trade” the stock, adding additional shares if we see a return of downside volatility. Investors who have followed Dialogic over the last couple of years know all too well such volatility is possible.
When I bought this stock a few months ago, I noted that the company's fundamental value and industry trends would drive to the price to at least $35 this year. Here we are. The stock is still a reasonable buy, with the potential to run up to $50 in 1999 if investors get caught up in the hype about yet another way to play the Internet: “Internet telephony.” However, utilizing public “packet” networks for voice communications is anything but hype. The controversy over which hardware companies will benefit most continues, but what Wall Street fails to recognize is that the market is so huge, there's ample room for Dialogic.
To understand this situation better and how contrarian viewpoints periodically form the cornerstone of my investing style, you might want to check out my Nov. 23 journal on Dialogic.
BroadVision: Setting a trolling sell order
BroadVision (BVSN) has treated me well. Buying 400 shares at under $16, I overweighed the electronic commerce software specialist at a time when it was clear that most investors were failing to buy the stock as aggressively as other booming Internet companies. Today, I'm setting a trolling sell order for my remaining 200 shares. At the open, I will pace an order to sell at 58 1/2. The order is good until canceled.
I'm still quite bullish on BroadVision, but I think I'll have ample opportunity to exploit volatility for trading purposes. If my sell order executes, I will return to the stock.
Tech Stalker readers send me a significant amount of e-mail about Internet investment strategies. BroadVision is a good example of a lower-risk Internet investment, and I've used the position to underscore a number of strategies.
For starters, it is usually a lower-risk strategy to invest in companies that provide the pick axes, pans and Levi's to the Internet gold rush. BroadVision controls about a third of the high-level electronic commerce-enabling software market, with a blue-chip roster of customers and an entrenched position that is not easily torpedoed. More importantly, BroadVision represents a diversified play on a broad trend (electronic commerce), rather than a single-site, make-or-break Internet service offering or an infrastructure technology that generates revenues from a concentrated group of customers.
For comparison purposes, consider Inktomi (INKT), the company that perfects database indexing technology for high-profile applications like Yahoo!'s (YHOO) search engine. Granted, there's much more to Inktomi's long-term business model than search engine technology! Make no mistake, Inktomi develops top-rate technology, and the company will be a long-term diversified player in the Internet economy. Today, however, it is very dependent on contracts like Yahoo!'s. Sentiment for the stock could turn on a dime if any contract is lost.
Consider eBay (EBAY), the Internet auction leader. Granted, a company can translate brand power into long-term competitive advantage and profit. Amazon.com (AMZN) is doing just this, and its profits will come as the firm crystallizes its hold on new markets and its customer and distribution systems. But when reviewing options among single-site or single-service focused companies, investors need to pay careful attention to how a company's total strategy stacks up against the various sources of competitive advantage other firms might be able to muster.
In my book, even at a fraction of eBay's current valuation, I would never put a single dollar of my money in the stock. Could the stock triple in the next 18 months? Sure, but investing is not about profit alone. Risk management is important. In the Internet niche, it is vital to review a company's business plan for robustness. Venture capitalists do this, and it's fair to say a sizeable percentage of the Internet stock market niche is nothing more than a public venture-capital market.
MySoftware: Gunning for at least $30
In response to a very large number of e-mail messages requesting my take on MySoftware's (MYSW) recent earnings and the recent stock pullback, a quick note is in order. I'm very pleased with the company's fourth-quarter financial performance. The company's turnaround run has legs. Just as important, management has been able to execute, setting in motion extremely important relationships with companies such as Netscape and Intuit (see MSN Investor's news archive). I believe more relationships like this will unfold in 1999.
Today, only one official Wall Street analyst follows the company, but earnings estimates (50 cents per share for 1999) remain too low. This same analyst upgraded the company from a “neutral” to a “buy” on Feb. 16, with the stock closing at 19 9/16 on the previous day. Where was this Wall Street firm when the stock was $13 cheaper, and it was abundantly clear that a major turnaround was in the works? Enough said.
MySoftware now represents a huge portion of the Tech Stalker portfolio. There are a few shares freely traded on the open market (the “float”), and when “weak hands” see the technology sector go through periods like we are witnessing now, pullbacks are inevitable. Yet even though the stock is extremely volatile, I view the recent pullback as nothing more than a garden-variety correction. The percentage loss is large, but such a loss is not unusual in situations like this.
I intend to hold my entire position. I believe this stock will make a run to at least $30 this year, and the upside could be substantially higher if the company's Internet operations gain even more momentum. As far as Internet content/property segments are concerned, those targeting the small-business operator hold tremendous promise. Through 1999, the value of Internet properties that address this niche market will increase significantly. MySoftware is doing the right things -- in the right place and at the right time. |
