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The Internet Financial Connection, February 26, 1999 Presented by Mark Johnson, Editor of the IFC techstocks.com It appears exclusively on Silicon Investor techstocks.com -------------------------------------------------------------- To Subscribe to this Newsletter: Send an email to <mailto:ifc-request@mLists.net> with "subscribe" in the message body. Please tell a friend about this newsletter :) -------------------------------------------------------------- Note To Readers: Do you have a stock idea that you think will appreciate in value over the coming months or years ahead? The Internet Financial Connection will now be accepting write ups from individual investors on stock ideas they/you like. The article length should be about 4 to 6 paragraphs, what they do, why you like them, why their stock will appreciate and an overall view, just a general write up. Before writing the article, please send an email to <mailto:markuss@triton.net> to confirm and discuss the topic for an inclusion date in this letter. There is no guarantee that all stock ideas presented will be included. No bulletin board stocks please! Stocks must be over $5 to be included. Only under special circumstances will a stock be included that is under $5. Thank you Mark Johnson, Editor IFC -------------------------------------------------------------- This newsletter can be viewed at http://www.techstocks.com/~wsapi/investor/newsletter-103-1 In This Issue: 1. 'Supercharged' Companies Present Once in a Decade Opportunity 2. Warner Lambert 3. Davox 4. Equifax 5. Highlights on SI: Programmer's Paradise 6. Interesting Articles On The Internet by Joe Dancy 7. Highlights on SI: by Tom Taulli 8. Highlights on SI: Follow The Leaders by David Zgodzinski 9. Disclaimer ---------------------------------------------------------- 1. techstocks.com Joe Dancy, co-editor of the IFC and editor of the The Lone Star Growth Investor members.aol.com provides the following interview with Jim Oberweis, Sr. of the Oberweis Report. AudioInvestor.com provides an audio version of the interview. View the link below audioinvestor.com if you would prefer to listen to the interview. Below is the write up. We are seeing history made in this market according to veteran money manager Jim Oberweis, Sr. Compared to large firms, small growth companies are as undervalued as they've been in decades. A value-based growth investor, he buys companies with rapidly growing revenues and earnings - looking for companies growing both revenues and earnings at least 30% or more - but selling at a price to earnings ratio no more than one- half the growth rate. "Supercharged" companies, he calls them. Where is he finding these companies today? Mostly in the small and micro-cap sector. Many are technology companies. Firms that are unloved and overlooked by most institutions. And he says "there are plenty to choose from" - at attractive prices. Oberweis has published a monthly newsletter for 22 years and also manages three mutual funds. Companies that he is recommending, and adding to his portfolios, are growing earnings and revenues at an average rate of 90% a year - but are selling at forward price/earnings ratio of less than 30 - about the same price/earnings ratio as S&P 500! "What we are seeing are gross undervaluations in an area of the market that has been overlooked," but he notes "eventually money will flow" into the small and microcap sectors. Once the money flow begins, "the trend [of small and micro-cap outperformance] could go on for four or five years." Oberweis notes that small companies are at the lowest valuations they have ever been in relation to larger capitalization stocks - reminding him of a period in the 1970's where the "nifty fifty" attracted all the attention from investors. Shortly thereafter, small cap growth companies outperformed for six or seven years. And he has an excellent track record at selecting growth stocks. The Hulbert Financial Digest noted that "The Oberweis Report has beaten the market by a wide margin during the time the HFD has tracked the letter." Over the last two or three years there has been "excess optimism" for very large companies. This is reflected in the valuations of the S&P 500 component companies. We are at "all time highs" with regard to the S&P valuations - at least the highest of the last 30 years - and are well above historical valuation ranges. According to Zack's, the S&P 500 component companies may grow earnings next year by 8% or so. For the last five years the S&P 500 index has averaged a gain of 24.1% a year, well above historical norms. During that same period small caps, measured by the Russell 2000, gained 10.2% a year. The difference in this long term performance - around 13.9% - is an astounding, and unprecedented, gap. This "implies a lot of risk" for the S&P 500 - but Oberweis stops short of predicting a correction. "It is difficult to time the market" he notes. In the end, he just finds great companies at reasonable valuations. And that leads him to smaller companies, and to companies that use technology to give them an advantage in attempt to achieve "supercharged" growth. Oberweis "won't look at companies" unless they have earnings. And he requires revenue and earnings growth in excess of 30% - in fact most have growth in excess of 50%. He also requires low relative price/earnings ratios, future growth potential, low price/sales ratios, and strong relative strength. What are some of the "supercharged" companies Oberweis likes now? Biogen (BGEN 96 1/4) for one. Recommended at $50.25 in August of 1998, it has run up to $98 - but he still rates it a buy. In 1999 they see BGEN earning $1.10 or more. Drug delivery firm Andrx Corp. (ADRX - $66 1/2) is expected to earn $1.50 this year, and is on the road to very profitable growth. Drug delivery is a segment of the pharmaceutical industry that is growing very strongly - the sector formulates compounds to increase the effectiveness and delivery of prescribed drugs to the body. RF Micro Devices (RFMD - $77) is a leading supplier of radio frequency integrated circuits. Their product line includes quadrature modulators, quadrature demodulators, LNA/mixers, IF amplifiers, attenuators, and linear power amplifiers. RFMD is expected to earn $1.20 to $1.30 next year. TransSwitch Corp. (TXCC - $37 1/4) designs, develops, markets and supports highly integrated digital and mixed-signal semiconductor equipment to the telecommunications markets. The Company's customers are original equipment manufacturers (OEM's). TXCC is expected to earn $0.80 next year. Suprema Specialties (CHEZ - $5 3/4) is a non-technology selection. Manufacturing and marketing premium gourmet cheese products, it packages and resells to food service distributors and food manufacturers. Revenue in the latest second quarter rose 37% to $13.7 million from $10.0 million. EPS grew over 60% to $.18 vs $.11 in the year-ago period. Selling at a trailing price/earnings ratio of 10, the company is expected to earn $0.80 next year. Tricom (TDR - $7 1/2) is a diversified telecommunications company providing national long distance service, local service, cellular and paging service, and Internet access throughout the Dominican Republic. Earning $0.76 in 1998, the company is expected to earn $1.00 in 1999. Silicon Investor members can get a complimentary copy of the latest Oberweis Report by calling (800)-323-6166 and mentioning that they read the article on SI's Internet Financial Connection. ----------------------------------------------------------------- 2. techstocks.com Scott Schuppie of Grace Equity Management provides the following stock idea on Warner Lambert (WLA 67 1/4). Below is the write up. Warner Lambert essentially has three divisions; consumer healthcare (which makes Sudafed, Rolaids and Listerene), confectionery (Halls, Certs and Dentene) and the pharmaceutical area that develops and distributes drugs. "The bulk of Warners' profits come from their pharmaceutical division," says Scott Schuppie President of Grace Equity Management (which was up 64% in 98). "Warner is undergoing a change in management and I think they will eventually sell or spin-off their consumer healthcare and confectionery businesses. We would view that as a major positive." Warner recently announced that they would acquire Agouron for $2.1 billion in stock. Schuppie views this acquisition as positive because Agouron is one of the few biotech companies that are profitable. Their primary product is Viracept. "It is the number one protease inhibitor against HIV and will immediately make Warner the leader in that area and increase their bottom line," says Schuppie. Schuppie notes that a dark cloud has been looming over Warner. One of their drugs, Rezulin, which is used in the treatment of Type II Diabetes, is being reviewed by the FDA. Of 1.4 million prescriptions for Rezulin, 33 people that were using the drug have died. Scott adds that when Eli Lilly introduced Prozac, there was a similar occurrence and a small number of people were badly effected by the drug. The FDA reviewed Prozac but did not call for any more clinical trials. He thinks that when the FDA reviews Rezulin they will not call for more clinical trials because only a small number of people were affected, relative to the people that use the drug. He estimates that Rezulin should generate revenues of $780 million in 99'. Warner currently has compounds in development for prostate cancer, arthritis, Alzheimer's, and the very promising new YMO87 for congestive heart failure. They are coming to market with a new drug called Celexa which should add another nice revenue stream to the company. Lipitor, Warner's blockbuster cholesterol drug will remain the main driver for the company. Lipitor had $2.2 billion in revenues in 98' and Schuppie predicts that number to grow to around $3 billion in 99'. He rates the stock a buy and estimates they should earn $1.96 in 99' and $2.39 in 00'. He is looking for the stock to be in the $100 to $110 range by late 99', early 00'. There is a thread that discusses WLA on SI. Subject 11513 ------------------------------------------------------------------ 3. techstocks.com Stan Kiefer of Stan D. Kiefer & Associates and Victor Halpert of Robertson Stephens provide the following stock idea on Davox (DAVX 8 5/8). Below is the write up. Stan Kiefer of Stan D. Kiefer & Associates takes a more different approach when selecting stocks. He tends to look at the inside of a company or "the numbers" rather than chasing a hot company in a hot sector of the stock market. He looks for companies that are down significantly from their highs and sold off by Wall Street for one reason or another. Stan must be doing something right because according to "Nelsons, World's Best Money Managers", his firm is ranked 12 out of over 500 other entrants, producing an annual return of just over 22%. One company that he likes and has been thrashed from their 52 week high of $35 a share is Davox. They are a provider of inbound, outbound and call-blended solutions for telemarketing, collection applications and other customer contact activities. Their products enable call centers to more effectively manage inbound and outbound calling applications, while significantly improving the quality of each customer contact. Click here for more information about what they do. "Davox has about $4 per share in cash and have very strong cash flows," says Stan. "Their stock has been beaten up because there were delays in orders which caused a drop in revenues... They recently authorized the repurchase of 3 million shares, have virtually no debt and have the flexibility to acquire technology and ride out the storm. Victor Halpert, an analyst with Robertson Stephens, notes that Davox has the best distribution agreements in the industry. Companies that distribute their products include; Siemens, Lucent Technology, Siebel Systems and Nortel. He adds that Davox was unable to close 6 orders prior to the end of 98'. "We believe that these orders were delayed and expect that will be booked in the first quarter of 99'." Victor believes that Davox will take market share away from the competition over the next few years. In 98', they had revenues of $89 million. He figures they will post revenues of $95 million in 99' and $114 million in 00', while earning $0.68 and $0.88 respectively. There is a thread that discusses DAVX on SI. Subject 14855 --------------------------------------------------------------------- 4. techstocks.com Eric McKissack of Ariel Capital Management arielmutualfunds.com, provides the following stock ideas on Equifax (EFX 37 5/8). Below is the write up. Equifax is a provider of consumer and commercial credit information. They furnish credit information primarily to banks and mortgage companies so that better credit decisions can be made. Recently, their stock dropped because there was a shortfall in earnings. The reason for the shortfall was a disappointment in earnings from their subsidiary in the United Kingdom. There were accounting irregularities associated with the matching of revenues. "There were concerns that their other divisions would incur the same problems," says Eric McKissack of Ariel Capital Management. "I believe that the event was isolated and will not happen again." Management was replaced at that division and the controls were strengthened. Equifax operates domestically, in Europe, Chile, Argentina, Spain Portugal, Canada and is expanding their global presence. Eric adds that they have very strong cash flow, have been buying back stock and have been eliminating lower margin operations. They have also exceeded internal goals to update their computers and make the Y2K compliant. Eric views the stocks weakness as a buying opportunity. He figures they will earn $1.55 this year and $1.90 in 00', with their stock hitting the high 40's within the next 12 to 18 months. There is a thread that discusses EFX on SI. Subject 24739 ----------------------------------------------------------------- 5. techstocks.com KellyW is the creator and an active participant on the PROGRAMMER'S PARADISE (PROG) thread on SI. Kelly provides the following commentary on Programmer's Paradise (PROG 13 3/8). Below is the write up. PROG is an "internet play". In truth, PROG is a solid company that sells through multiple channels and the Internet is one sales channel, and growing. In fact, PROG's Internet sales growth posted a 205% gain, so far in Q1, 1999. (See the Press Release dated: February 12th - Business Wire.) biz.yahoo.com STOCK PRICE APPRECIATION: I believe PROG as a chance to double in the next few months. Primarily because the consensus estimates are for $.16 earnings for Q1 and these estimates, I feel, are quite low considering PROG's path and proof of growth. I see PROG blowing past those estimates to $.20 or even $.22 a share and with gross sales of $77 to $80 Million. (Q1 is seasonally a smaller revenue quarter for PROG than Q4.) One ardent SI poster, Zeev, thinks PROG will do $1.30 for the year in business, while estimates are at $.85. Zeev's as good as most analysts, but don't tell him I said that, as I don't want it going to his head! As a point of reference, PROG beat consensus estimates of $.28 a share for Q4, 1998, by turning in earnings of $.32 a share, 4 cents better. DOWNSIDE RISK: I think PROG has little downside risk. Because currently PROG is trading (14 ½) near the bottom of its past 45 day trading range (13 ½ to 18) and shows strong support even on very light volume and because PROG is such a value. VALUE: PROG's P/E is 22. Very low for the business space it's in. If you look at other internet companies, and let's take a snapshot of some comparative values, and you be the judge: Company NAME - P/E) PROG - 22 DRIV - no earnings. $1.01 loss BYND - no earnings. $1.28 loss YHOO - 1171 EGGS - no earnings. $2.55 loss AMZN - no earnings. $.84 loss EBAY - 3918.95 Of course, I could go on and on with these various interNUT comparisons. Why is PROG at such a value? UNDISCOVERED FOR ONE REASON: PROG has a small following of only two analysts, both rate the company a strong buy. PROG has previously been a very tight lipped company, believing that there was never a legal need to manage the street. PROG has a new CEO, Bill Willett, as of 7 months ago. Mr. Willett has changed the PROG business plan to one of exploit the internet and talk to analysts and perform. Increased exposure is just beginning. With only 4.8 million shares in the float, it won't take much to have the stock "pop". (Note: PROG just filed an S-8 to make available another 1 million or so shares. This is a normal thing, but insiders will be able to sell some stock and hence, the float may increase a bit during 1999.) PROG is also undiscovered as an Internet company because it has not had the luxury of a recent IPO, during the past 6 month "mania period". Further, PROG's new website didn't go on-line until mid January of 1999. So, PROG is very new to the scene as "an Internet play". PROG is also one of the more legitimate investments in that space. WHAT PROG DOES: PROG sells software and hardware to a very loyal base of customers: Computer professionals. PROG has plenty of room for expansion, even into retail channels or to simply exploit the segment they already dominate. For PROG, hardware is a new source of content for them to sell. PROG had made a nice profit ($.66 per share earnings in 1998) of selling primarily just software. In January, Q1 of 1999, PROG began selling hardware too, to provide "one stop" shopping to their customers. PROG incurs no expenses in this model. It's a partner driven, drop ship, DELL model for hardware; ie, no inventory. All PROG does is "count the money". They might as well sell other stuff to internet shoppers who are already in process of loading up their carts. PROG's consensus analyst estimates of $.16 estimates for Q1 and $.85 for the year do NOT factor in hardware sales at all, an easy 10% adder. NEW PARTNERSHIPS: Adding hardware is not their only source of growth. PROG recently added another software content vendor, the publisher of Code Wright, as a partner. PROG will function as Code Wright's sole distributor (See Press Release dated: February 11th. biz.yahoo.com If you want to buy Code Wright, PROG is the one that will profit from that purchase. The more of these exclusive partnerships, obviously, the more income. But, PROG has several other exciting channels for growth, namely a powerful new website. BRICK AND MORTER AND PROG'S NEW WEBSITE: PROG has primarily been a catalogue company. Which is still good business. PROG incurs no expense to print and mail its catalogue, that serves as a glorified calling card, because PROG's advertisers foot that bill. PROG's new website will increase profits and business. In fact, PROG's new website has contributed to an increase of Internet sales growth of 205% (Again, see the Press release dated: February 12th - Business Wire.) PROG's old web site was too mundane and simply not up to snuff. The new site pparadise.com is user friendly and powerful. Again, the website imporvement is already showing a significant increase in traffic and most importantly, buyers of product. The website will increase profits because the overhead is less than running receivables through the catalogue model. So, PROG, now has a strong INTERNET PRESENCE in addition to its already solid business foundation. More and more of PROG's sales will shift to the internet, increasing margins, and, attracting new customers. ----------------------------------------------------------------- 6. techstocks.com Joe Dancy, co-editor of the IFC and editor of The Lone Star Growth Investor members.aol.com provides the following links to Interesting Articles On The Internet. These articles were from a daily worldwide search of over 150 newspapers and magazines. Subscriptions to his newsletter are FREE. members.aol.com INTERNET AND ELECTRONIC COMMERCE A look into the crisis at e-trade offers a cautionary lesson in the fallibility of Internet commerce iht.com James Cramer is taking TheStreet.com public nypostonline.com | ||||||||||||
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