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The original version can be found at http://www.techstocks.com/~wsapi/investor/newsletter-67-1 To get The Internet Financial Connection newsletter e mailed to you for FREE, send an e mail to <mailto:ifc-request@mLists.net> and write "subscribe" in the body of the letter. Louis Navellier, manager of Navellier Equity Funds and Editor of MPT Review navellier.com, provides the following commentary. Below is his write up. "The U.S. dollar recently surged to new highs against the Japanese Yen after Treasury Secretary Rubin reaffirmed that the U.S. dollar would likely remain strong relative to the United States' major trading partners. Subsequently, the White House announced that stronger than expected tax revenues would result in the first budget surplus in almost thirty years! All this news resulted in a big bond market rally that drove long-term Treasury bond yields down towards the 5.8% level. While the bond market celebrated, the stock market sold off sharply, causing the Dow Industrials to fall by 150 points in one day. Normally the stock market celebrates with the bond market, so why did the stock market fail to rally? The answer has to do with institutional investors' concerns regarding how the strong U.S. dollar will continue to adversely impact the corporate earnings of large multi-international companies that dominate the Dow Industrials and the S&P 500. Not only did the big multi-international companies sell-off, but virtually all technology stocks sold off as well due to concerns about how the strong dollar hurts U.S. technology companies due to the fat that their weak currencies provide Asian companies with a tremendous price advantage. The adverse impact of a strong U.S. dollar against technology stocks recently became increasingly clear when Hewlett-Packard's recent announcement, technology stocks have suffered due to concerns that their future earnings would continue to be hindered by tremendous competition they now face from Asia. The advance-decline line that measures the number of advancing stocks versus declining stocks continues to falter. The current rotational correction will likely persist as long as trading volume continues to decline. Ever since tax season ended in late April, mutual fund inflows slowed and both NASDAQ and NYSE trading volume peaked. As trading volume dwindles, the stock market will continue to languish. The breadth and power of the stock market will likely continue to get increasingly narrow in the upcoming weeks. Trading volume is notoriously light during the summer months and unless something unforeseen "sparks" the stock market, many stocks will just drift sideways for the next few weeks. The next "spark" that will likely help determine the course of the stock market will be the second quarter earnings announcements in mid-July. Until then, the stock market is at the mercy of the U.S dollar, interest rates and analysts' earnings estimate changes. Although the U.S. dollar is hindering many large multi-international and technology stocks, interest rates remain supportive for many companies, especially those with reasonable price-to-earnings multiples. For 1998, the Russell 2000 should have at least 16% earnings growth The recent optimism in the analyst community is primarily associated with small-to-mid cap stocks, which have released better earnings than the S&P 500 for the fourth straight quarter. In the latest quarter, the Russell 2000's earnings surged approximately 8%, more than doubling the earnings of the S&P 500. Even better, the Russell 2000 is dominated by domestic companies, so it is much less vulnerable to adverse impact of the strong U.S. dollar. The U.S. economy has been bolstered by record consumer confidence and will likely remain strong for the remainder of the year. This consumer optimism is rubbing off on the analyst community, which has been aggressively revising their earnings estimates higher for many stocks in the Russell 2000. For 1998, the Russell 2000 should have at least 16% earnings growth, which is literally four times the earnings expected for S&P 500 this year. So why is the S&P 500 continuing to perform well? Barron's recently had an excellent article that discussed why the Russell 2000 continues to lag the S&P 500. Barron's cited four distinct reasons why the S&P 500 continues to significantly outperform the Russell 2000. First, mutual fund investors continue to "lust" after large cap stocks and pour money into index funds, while small cap funds are receiving only a trickle of new cash to invest. Second, foreign investors, encouraged by the strong U.S dollar, have stepped up their purchases of U.S. stocks, but continue to exclusively favor only the large stocks in the S&P 500. Third, investors are more focused on the sustainability of earnings, rather than raw earnings growth. Despite the fact that small-to-mid cap stocks have had superior earnings for the past year, investors are more comfortable with companies that can sustain good earnings due to their market dominance which favors many large cap stocks. Finally, the lack of liquidity and higher trading costs associated with many small cap stocks is discouraging many institutional investors from accumulating small cap stocks. Barron's referred to many small cap stocks as "roach motels" because they are "easier to get into than to get out", due to the fragile liquidity and lack of trading volume than characterizes many NASDAQ stocks. That is the bad news. The good news, according to Barron's, is that the Russell 2000 is trading at the lowest price-to-earnings ratio relative to the S&P 500 since 1990! Then in 1991, my Model Portfolios surged over 80%, so I continue to believe that investors should allocate more money towards small-to-mid cap stocks simply because they are cheap and on the verge of a historic rally. All that many small-to-mid cap stocks need is rising trading volume to propel them higher. NASDAQ trading volume could perk up as soon as early July, when the second quarter earnings announcements commence. Investors should seek refuge in mid cap stocks temporarily and get ready to "pounce" on small cap stocks There is no doubt that the best Reward/Risk Ratios are now associated with many mid capitalization stocks such as Capital One and Maytag, which I added to my Model Portfolios this month. As soon as the liquidity improves for many small cap stocks and their Reward/Risk Ratios start to recover, I stand to "pounce" on many small cap stocks. Until then, many mid cap stocks will continue to dominate my Model Portfolios simply because they are currently safer and have more attractive Reward/Risk Ratios. In summary the stock market is just treading water waiting for the rotational stock market correction to run its course. The declining trading volume that now characterizes both NASDAQ and the NYSE makes it impossible for many stocks to rally. Furthermore, as the breadth and power of the stock market continues to deteriorate, most stocks will continue to drift listlessly until something "sparks" the stock market. Currently, the strong U.S. dollar is holding many large multi-international and technology stocks back because of future earnings concerns. However, falling interest rates and an increasingly optimistic analyst community should eventually provide the "spark" to ignite many stocks. Investors should seek refuge in mid cap stocks temporarily and get ready to "pounce" on small cap stocks as soon as their liquidity improves and their volatility dissipates." Gulbir Madan of the Neptune Fund provides the following stock idea on Hutchinson Technology (HTCH 25 3/4). Below is the write up. Anyone that owns technology stocks have been affected by the recent downturn in that sector. Gulbir Madan of the Neptune Fund feels that technology stocks have just about bottomed here. He points out that nothing has changed since last October when technology stocks first plummeted on Asian and foreign fears. Investors are selling technology stocks because of renewed fears in foreign economies and he views the latest downturn as a buying opportunity. One of his favorite selections right now is Hutchinson Technology. They are the leading supplier of TSA (tray suspension assemblies) for hard disk drives. Suspension assemblies are critical components of hard disk drives that hold the recording heads in position above the spinning magnetic disks. Gulbir notes that they do not have any real competition, nor does he see competition coming into this area of the market because many companies are exiting this business and "no one wants to be associated with the disk drive industry anymore." It is one of the hidden stories in the technology area Revenues for the most recent quarter ending March 28, 1998 were $95 million and they had a deficit of $0.73 a share. Last years comparable quarter showed revenues of $124 million and earnings of $0.91 a share. The decline in year over year numbers was attributed to weaker demand for conventional suspensions as a result of inventory reduction among the major disk drive makers. In a press release Hutchinson's CEO Wayne M. Fortun said, "Shipments of conventional suspensions will continue to trail prior year levels as customer demand shifts toward TSA suspensions... Our TSA suspensions are now in use on seven disk drives currently in production and accounted for 33 percent of second quarter net sales and 11 percent of second quarter unit shipments, up from 17 percent of net sales and 5 percent of unit shipments in the fiscal 1998 first quarter. We expect this industry adoption of TSA suspensions to continue and that TSA suspensions will account for half or more of our fiscal 1999 unit shipments." Gulbir adds that there were production inefficiencies that affected earnings but feels those problems have been resolved. Some of Hutchinson's larger customers include; Seagate, Western Digital and Quantum. As more computers are sold, Gulbir believes that Hutchinson will be a direct beneficiary, even though there have been pricing pressures for most computer component makers. "They are the leader in their field and they have great management," says Gulbir, "It is one of the hidden stories in the technology area." He is looking for a loss of $1.50 this fiscal year ending September 1998 and expects them to earn around $2.50 for fiscal 1999 with revenues of $650 million. Hutchinson had revenues of $453 million in 1997. "They are trading at 10 times next years earnings and their stock could easily trade at 20 times those estimates or $50 within the next 6 to 12 months," Gulbir says. Bob Bose of Green Mountain Asset Management stockresearch.com provides the following stock idea on Sola International Inc. (SOL 38 1/4). Click here to read the entire report. Below is his write up. "Sola International Inc. is not widely known either to the general public or to the Wall Street community, as it was a former business unit of Pilkington plc only three years ago. But it controls either the number one or number two positions in the markets it serves. Specifically, Sola is a manufacturer and distributor of prescription and plano (i.e. sunglass) lenses with an approximate 25% global market share on a unit basis. The company derives 49% of its revenue from North America, 28% from Europe and 23% ROW (Rest of World). Although basic glass lenses are a commodity item, with all that entails, the company increasingly sells plastic lenses (85% of sales) and 60% of their sales are value added lenses, such as progressives (no line bifocals), photochromics (darken when exposed to sunlight), etc... Essentially, Sola International is a "pure play" on the demographics of the aging Baby Boomers and their certain need for eyeglasses. On a much smaller scale, and of vastly inferior quality, the company has many of the same characteristics as Gillette - a reasonably high tech product, where the most advanced version can be sold into the higher income domestic market, and the "lower priced spread" can be sold into the third world markets, with intermediate products for the mid range markets. If executed well, the company can benefit as global disposal incomes increase, and the population continues to age. That's the long term investment thesis, and the favorable demographics provide a strong tailwind. It doesn't guarantee success, and Sola is no Gillette, but in our opinion it is a reasonably priced stock in a not so reasonably priced market. Since their formation, the company has produced up earnings each year (even though the stock price is essentially unchanged from late 1996), but profitability could clearly improve. In our view, some of the pressures on profits are a function of heavy investment spending for the roll out of the proprietary Matrix System, which allows the manufacture of anti-reflective lenses in "about an hour" (at Lenscrafters), and investments in China. Our view is that once the free cash flow improves, the multiple will follow. In the meantime, valuation is reasonable, so relative downside risk should not be significant. In short, we expect to "get" the earnings growth, unless management falters. However, if management performs reasonably well, and expense growth is controlled in the "out years", then cash flow will improve, and not only should we benefit from earnings growth, but in all likelihood the multiple will improve as well - a recipe for superior performance. In short, Sola International Inc. meets our criteria for growth at a reasonable price." Roger Groh of Groh Asset Management (415-352-0678) and Peter Tallas from Friedman, Billings & Ramsey provide the following stock idea on American Capital Strategies (ACAS 23 3/4). Below is the write up. American Capital Strategies went public late last August and started trading in the $15 area. Their shares dipped to a low of $17 in December and is now trading around $24 per share. American is a buyout and specialty finance company. They provide senior debt, subordinated debt and equity to companies in need of capital for growth, acquisitions, employee buyouts... etc. In short, they will invest $1 million to $20 million in a company that needs money. They do not provide startup financing. What is interesting about American is that they are a registered investment company and is required to pay out 90% of their income in cash in the form of a dividend. The Chairman, David Gladstone, was CEO of Allied Capital before moving to American and is a very experienced manager with over 20 years experience in the field. American has already financed $90 million and is ahead of schedule Roger Groh of Groh Asset Management views American as an attractive investment because "it is reasonably priced, has terrific management, good yield and it provides good long term appreciation for investors." Peter Tallas, an analyst at Friedman, Billings & Ramsey notes that he expected American to have financed around $67 million to different companies by June of this year. American has already financed $90 million and is ahead of schedule. Peter estimates that American will earn $1.29 for year ending December 1998 and $1.62 for 1999. It is estimated that American will pay a dividend of $1.22 in 1998 and $1.54 in 1999. Since American is ahead of schedule for making loans, Peter is considering raising estimates. Mohan Marette is the creator and an active participant at the India Coffee House here on SI. Mohan provides the following commentary about what goes on there and what his thread is all about. Below is his write up. "In India I found a race of mortals living upon the Earth. but not adhering to it. Inhabiting cities, but not being fixed to them, possessing everything but possessed by nothing". - Apollonius Tyanaeus - Greek Thinker and Traveler 1st Century AD Usually when people talk about countries like India or China words like 'antiquity', 'Culture','Civilization' and the like come to mind and rightfully so. As two of the longest continuously living civilizations of the world these countries are re-emerging once again to take their place in the world ,both militarily and more importantly economically. History has shown us that civilizations rise and fall and both India and China had their days in the sun many a time since the beginning of human civilization contributing generously in the areas of Mathematics,Astronomy, Arts, Architecture, Literature, Philosophy, Religion etc. but then came the inevitable-the decline. Pundits in academia, government and business circles now say that the time has come once again for India and China to take center stage in the world and that the 21st century belongs to them. True? Hard to say but if one were to go by the recent developments of the past few years the predictions could very well turn out to be true. India and China combined represent over 40% of the world population and that is over 2 billion potential customers more than any other in the world. The economies of both countries have been growing nicely for the past few years and barring any unforeseen calamity in the countries it is expected to continue for many years to come,the recent turmoil in South East Asia notwithstanding. Having spent half of my life [the early years] in India and the rest in the U.S I think I am more familiar with these two countries than China and hence my decision to start a thread about India. "In religion, India is the only millionaire .... The One land that all men desire to see and having seen once, by even a glimpse, would not give that glimpse for all the shows of all the rest of the globe combined". - Mark Twain - American Author 1835-1910 Like most of the SI members I am an active investor of sorts and as such spend a lot of time surfing the net to keep up with the breaking business news,world events,the stock markets, and the like but at times one gets tired of all that and needs some sort of a diversion and that proclivity for diversion prompted me to start the thread called INDIA COFFEE HOUSE. There is a popular place in Connaught Place [a shopping center] in New Delhi with the same name where people can get a nice cup of hot coffee or tea and snacks and hang out and I used to and that is where the name come from. The purpose of the forum is to provide an outlet to inform, discuss, criticize, disseminate, suggest, analyze or anything in between that is deemed appropriate by the participant and by SI of course. "India was the motherland of our race and Sanskrit the mother of Europe's languages. India was the mother of our philosophy, of much of our mathematics, of the ideals embodied in Christianity... of self-government and democracy. In many ways, Mother India is the mother of us all." - Will Durant - American Historian 1885-1981 Y'all are cordially invited to India Coffee House and we are open 24 hrs a day , you hear. Joe Dancy of The Lone Star Growth Investor members.aol.com provides the following following links to "Interesting Articles On The Internet." Subscriptions to his newsletter are FREE. Click here for more information. One of the best company profiles you can find on the Internet: stocksheet.com Article on how semi equipment stocks are down an not out: forbes.com Copper deposition has a bright future in semiconductor manufacturing: sumnet.com More companies are giving incentives ("trading stamps") to do business at an internet site: mercurycenter.com This article will explain the advantages of buying and holding stocks: washingtonpost.com Investors who traded in any of 1,659 Nasdaq stocks during certain time periods between May 1, 1989 and July 17, 1996 may be eligible in the recovery from proposed settlements in the Nasdaq Market-Makers Antitrust Litigation: nasdaqlitigation.com Semiconductor sales forecasts cut due to pricing pressures: techweb.com | ||||||||||||
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