This may be part of the reason for the movement today.
Regards
j.oil
ALERT INVESTOR
Tuesday, May 18
by Peter Kertes
What an amazing week for screw-ups! First, our vaunted Air Force, trying to
fight a war without getting its fingernails dirty, went ahead and bombed the
Chinese Embassy in Belgrade, using 4 year-old phone books provided by the
ever-alert CIA. Then Boris Yeltsin, who has a lot of trouble walking these
days but whose drinking arm is still as good as ever, took advantage of his
2% popularity ratings and fired his Prime Minister for committing 2 mortal
sins (by Russian standards): he was popular and he favored corruption
inquiries that led close to Yeltsin's vodka circle. Then the Chinese, who
stole enough of our secrets to know that the CIA does not make the kind of
mistakes Pres.Clinton claimed, made the assumption that we are jerking them
around, and they unleashed the mob on poor Amb.Jim Sasser, who had to eat
rations for a week and sleep on the floor. The formidable Berkshire Hathaway
reported down earnings, another indication that the world is passing "value
investors" like Warren Buffett by. Even in the NBA, which is at least as
important as the market, the #7 and #8 seeds in the East (Philly & N.Y.)
knocked out the #1 and #2 seeds (Miami & Orlando), for the first time ever.
(My Celtics aren't in it, so it doesn't really matter....) Finally, Bob
Rubin, who has looked constipated for at least 2 years now, decided to leave
Washington the day before a CPI of 0.7% (about 8.5% inflation annualized) was
announced for April, throwing the stock market for a halacious loop. Whew! I
told you you'll need seat-belts, but this is more like bungee jumping.....
Things will be back to normal soon. The Chinese had the benefit of
Mr.Clinton's profuse apologies - something he had plenty of practice in
during his impeachment trial - and the lunacy in Serbia is about to end too,
now that we bombed the country into the dark ages and the whole Balkans have
been turned into a huge Tent City. Earnings season is over, with a very good
report card, the bond hasn't collapsed, and GE and CSCO are splitting their
stock. Everything's going to be all right with the world - you heard it here
first.
The last 2 days' selloff is another attempt - the first one was the quick 200
point drop the morning of Rubin's resignation - for nervous sellers to exit,
but I think it will not see a lot more follow-through. The downside volume
was low both days, which is an important clue. The CPI numbers that caused
this drop will be dissected, and it will be shown that both oil and tobacco
prices had out-of-the-ordinary price rises last month, and that the pricing
mechanisms we have in place will stay on track with very low inflation -
heck, now that American Airlines got its wrists slapped, guess what'll happen
to air-fares! The Open Market Committee will not jump on one month's
statistics and they will leave rates unchanged, especially 5 days after
Rubin's exit. I think the market will trade sideways for a while below
11,000, then make up its mind in July or thereabouts whether it wants to go
higher or lower. The blip in no-growth cyclicals is over and leadership has
swung back to the techs. If the consumer still feels good this summer, we
will start discounting a good Christmas (especially on the web) and funds
will continue to flow into the market. If not, the best move of 1999 may
already be behind us. In any event, a sideways market is always good for
stock-picking. The microcaps, as usual, march to their own drummer - and
we've done very well lately..
TOP PICKS
Artecon (ARTE, 2¼, NAZ) is in a hot area, network storage, same as EMC and
Storage Tek. The company is just becoming profitable. You can buy all you
want below 2 1/4 right now, placing orders with some patience. The last
earnings report, for the March quarter, showed 33% revenue growth and
earnings of 5c a share, mostly as a result of some carryforwards. For the
fiscal year ended in March, revenues grew 45% (partly due to an acquisition)
but there was a loss of 25c. ARTE has 21.6 M shares and a negative net worth.
On April 30, ARTE agreed to merge with Box Hill Systems (BXH, 5 7/8, NYSE).
We'll get 0.4 shares of BXH for every share of ARTE, so you can say that
there's not much take-over premium left in the stock. But, and this is a big
BUT: BXH has $4.50 in cash ! In other words, BXH pre-merger is selling at 1.2
its cash or net worth (almost equal to its cash) BXH reported March quarter
revenues of 14.3 million, nearly flat, and earnings of 4c per share. On a
combined basis, with about 23M shares of BXH outstanding after the merger, we
are looking at pro-forma quarterly revenues of $33 M (for the 3/31 quarter),
with a growth rate of over 20%, pro-forma earnings of 4c per share and still
cash of about $3 per share.
The logic behind the merger is obvious (and the 2 CEO's have both said how
excited they were): geographic complementarity, perfect fit in product lines
and, obviously, BXH has the bucks and ARTE has the growth. There will be a
name change after the merger. Given a little growth, some joint cost-cutting
and additional synergies, it's not unreasonable to expect earnings of 35-40c
for the calendar year 1999. Both charts turned bullish recently, after a
tough 1998. What do you think the combined company will do when mutual fund
managers start buying a little-known network storage company with a revenue
running rate of almost $150 M and rising profits ? EMC has sold off lately
because one of its largest re-sellers switched to Hitachi's lower-cost goods,
but the industry will grow fast for many years to come and there's only a
handful of players.I think BXH is going to be a big winner over the 6-9 month
horizon. Plus BXH is marginable and ARTE is not.
Jaws Tech (JAWZ, 1 3/8, BB) is a company with proprietary skills in an
important area, internet security, and the stock has been pretty obscure,
until very recently, partly because it's based in Alberta, even though most
of their customers are in the US. The move over 1.20 in the past couple of
days is very significant, not just because the prior high of February was
overcome but because the sizable supply at that level, going back to early
1998, was also taken out. Volume has been on the rise too, especially in the
past week, and everything is in gear for the stock to work its way quite a
bit higher. Once past 1 3/4 - and I think the stock is capable of going even
higher this summer - it's in the clear, and a logical "consolidation" point
might come in the high $2 area. This buy recommendation is a good hold for
the 4-6 month horizon.
Virtual Games (ITOY, 50c, BB) which was discussed in these pages 2 moths ago,
is getting ready to move back up. A number of game acquisitions were supposed
to be signed in April and they never thought they'd go more than a month
without an announcement. But there will be several major press releases in
the coming weeks, beta testing in June, major orders soon thereafter and the
largest arcade industry show will be in November, where more orders are
expected. There is really no competition for what they do and the strategic
partners are all major companies. ITOY has essentially changed its whole
management and product focus in the past 3 months, and the dust only settled
recently It might explain why the chart has been in a relentless bearish
trend since the $3 high in November, actually breaking down below 50c in the
last few days. However, buying at this depressed level makes a lot of sense
and the series of press releases that will follow in the coming weeks will
kick the stock quite a bit higher.
PENNY-STOCK PICK
Once in a while I find a penny stock that looks very exciting, and this is
one. Lakota Energy (LAKO, 16c, BB) is a stable little energy play out of
Atlanta that already had a bullish chart before the last 10 days' action. In
the last 2 weeks the volume exploded, on no news at first. Then it came out
Wednesday afternoon that, though the energy business remains very viable,
they are buying a high-speed ISP in Houston. We had very good success with
IJNT (IJNT, back in buying range below 3), another high-speed ISP that almost
doubled a month ago for us, and this one is likely to do better. The total
LAKO float is 7M shares, about 17M outstanding. We don't know yet if the
purchase is for stock (more likely) or cash. The story is completely unknown.
The SI thread is less than 5 days old, and it will mushroom.
LAKO is coming off a double bottom. First resistance is at 3/8, after that a
straight shot to 3/4...but, with the new business, the chart loses meaning. I
think it will be like taking candy from a baby, but I've been wrong before.
Remember, it trades 1-2M shares a day and the whole float is 7M. A lot of
strong holders came into the stock lately.
PRIOR PICKS
The broadband area has indeed been all over the news, with AtHome (ATHM)
getting more attention every day and with our choice of 2 weeks ago, Broadcom
(BRCM, 91, NAZ) having hit 100 before pulling back. The stock is still a
compelling buy and it will be a significant beneficiary of the growth in web
traffic.
QuikBiz (QBIZ, 1 5/8, BB), our pick 2 weeks ago, traded off the $2 level but
everything is in gear for a move to higher prices. The test period on their
unique business-to-business mall is nearing completion and money flows in the
stock show continued accumulation. This will be a rewarding holding in the
next couple of months. GoCall (GOCA, 2¼, BB) reported record winnings at its
GoCasino.com division (despite a decline in wagers) and a tripling of traffic
since January. Also, their Country Star restaurant got national exposure
during the Country Music Awards telecast. The chart, however, is looking weak
and I suggest you sell your holdings.
Our eVision (EVIS is in the building!, 1 1/4, BB) has been a real winner, up
over 50% since the name change from Fronteer Federal, and trading at 3 times
our recommended price in February They are continuing their entry into
electronic brokerage and e-mortgages. At most, sell only part of your
position - it's going higher. UniView Tech (UVEW, 3 1/8, BB) exploded last
week on the heels of an alliance in convergence technology with PSINet,
rising to 3 times the price it was recommended at in March. I suggest you
take your profits on this one.
Henley Healthcare (HENL, 2 1/4, NAZ) is an humbling object lesson in not
making money with a good company. All the fundamentals are on the rise, the
stock is thin, they were invited to speak at a Sutro tech conference last
month and, still, the stock has gone nowhere. I am losing patience with this
one, I am sure you are too.
Finally, Voice Control (VCSI, 3 7/8, NAZ), last recommended in these pages at
2 1/4 in February, got a $4 buyout offer from Phillips of Holland, hoping to
beef up its speech technology through the acquisition. Not bad for 3 months
work for our readers.
Happy hunting.Your comments or spam are welcome at pkertes@aol.com
Peter
Disclaimer:The writer of The Alert Investor (A.I.) is not currently a
Registered Investment Advisor. It is the intent of A.I. to identify and
research companies that it believes might prove profitable investments.
However. A.I. is not liable for any investment decisions by its readers and
any use of the information provided is at the sole risk of the investor.The
information contained herein is provided as an information service only and
past performance of featured companies does not guarantee the future success
of an investment in that company. A.I. relies on various sources of
information that we believe to be accurate and reliable. However, A.I. makes
no claims or representations with regard to the accuracy, completeness or
truthfulness of any material contained herein.
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