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To get The Internet Financial Connection newsletter emailed to you for FREE, send an e mail to <mailto:ifc-request@mLists.net> and write "subscribe" in the body of the letter. This issue can be viewed at http://www.techstocks.com/~wsapi/investor/newsletter-72-1 Michael D. Burke is an active member on his own thread, Ask Michael Burke, here on SI. He provides the following commentary. Below is his write up. "I usually like to write about large themes and just mention a few stocks in passing. However, this time around I will comment on some stocks and industries and let the large themes appear where they may. We have recently seen a resurgence in technology stock prices. This resurgence is based upon horrible earnings (which were mostly "earned" with accounting tricks that fool the bubble-fed public and professional investors) and an even worse outlook for the future. The time seems ripe to look at which stocks may continue to prosper and which are simply part of the herd's instinct to throw money down a hole. I recommend buying stocks or long calls (a better idea in a toppy market, when options are available) on the positive issues and buying puts on the negative ones. I do not recommend straight short sales of stocks, as that strategy has a poor risk/reward tradeoff. Also, please note that these are theme-based recommendations and not trading tips. If you want short term recommendations, join me at the race track and I'll tell you which quarter horse is about to walk off with a quarter of my cash. 1. INTERNET STOCKS are one of the two broad areas of upside opportunity remaining in the technology sector. No, this is not investing. Heck, it isn't even speculating. These stocks are gambles. But, in a disciplined program of gambling, many of these stocks have the concept-based manic upside we gamblers love. Of course, the better-known leaders are all grossly overpriced and due for a collapse. We take care of that problem by buying puts on the American Stock Exchange Internet Index, the IIX. I do not know when total illusions like Yahoo, Amazon.Com, Excite or America OnLine will collapse, but we can expect a big bang when reality finally rears its ugly head. Just ask yourself, when was the last time you saw a good advertisement on Yahoo? Or, why do people pay a premium for mediocre service on America OnLine? And just how funky will AOL's accounting become before even starry-eyed bulls take notice? While you are at it, name all the book retailers in The Forbes 400. The only knock on this stock is that it has real revenues and earnings However, these companies have a currency, bloated stock prices, and they need to buy products and services to stay in business, such as it is. The service and product companies, mostly dinky garage operations, can pop on one order from these market capitalization giants. That is where we will do our fishing. Meta Group (METG) is a firm that provides research for Internet vendors and service providers. Research is a cheap product to produce. And, as Wall Street has shown us many times, it does not have to be worthwhile to sell in large quantities to marks who do not trust their own judgement. The only knock on this stock is that it has real revenues and earnings and reality often pays a penalty in the concept stocks. Netgravity (NETG) is another stock I like, though it has a nosebleed chart pattern right now. Their Adserver family of software products helps firms develop internet ads that nobody reads. Unlike METG, this is really a venture capital level company and that means you don't have to worry about pesky things like price earnings ratios ruining the dream for quite a while. Revenues are so puny, one new order could send the bulls stampeding into this thinly capitalized stock. Transaction Systems Architects (TSAI-hey, I once worked at a mutual fund company for a man who had that last name) provides software for those companies who want to lose money on electronic payments. There is a growing demand for their Base 24 line and the absence of amortization fees could continue to boost earnings. And there is the nub of a negative. TSAI has real earnings and revenues, in decent size, too. I like it, despite that drawback, but caveat emptor. There is currently a huge demand for TSAI's products, as losing money on the Internet has proven to be a sure path to equity nirvana for many firms. VeriSign (VRSN) is a net security specialist. Can a teenaged hacker wreak more financial havoc than a firm's own incompetent management? Who knows? But incompetent management seems to think so, and I see continuing sales increases for VRSN's Web Site ID and digital certificate products. And, good news. This is another venture capital level company that it is running a loss, so wise market veterans cannot value it. And, though hardly undiscovered, Double Click (DCLK) is another developer of useless net advertising. I hate to buy trading sardines, but it does have dinky revenues and increasing losses, so it fits the pattern of big winners in this sector. I consider DCLK a guilty pleasure, and it does have rapidly growing sales, even if they are from a small base. 2. CHIP AND CHIP EQUIPMENT stocks are an industry that will see overcapacity until Tiger Woods checks into a retirement community. Yes, this is a cyclical downturn we are suffering, but we are also seeing a secular downturn in margins that will hold even after the cycle turns. The most overpriced are the medium-sized companies in the logic, gate array, custom chip and mixed signal group, as there are still a number of bulls who believe that they will come roaring back to profit growth. A put buying program on Linear Technology (LLTC), Xilinx (XLNX), Maxim Integrated (do we still have segregation in this country? MXIM), Altera (ALTR), LSI (LSI-duh) promises huge profits on these disasters waiting to occur. Some may still have an accounting trick or two to pull out of a hat before admitting defeat, but capacity is coming on stream, systems on a chip are becoming more sophisticated and cheaper to produce, the big companies are eyeing their high margin businesses, and the end products are not selling as well as they have in the recent past. Start a put buying program over $30 on this Alpo eater Micron Technology (MU) near $30 is a joke. There is no there, there for this commodity DRAM producer. Even when MU posts nominal earnings, it never has any free cash flow. But tread slowly on this one. The Asian DRAM firms are once again building inventories and holding back production to stabilize prices. I refer to this as a DRAM scam, and it is the third attempt of this down cycle. The bulls always fall for this trick and buy MU because "they've seen the bottom." Then MU's lousy results moon them for real. The equipment companies are building products for an industry that is over the hill as far as its growth rate is concerned. Buy puts on any dead cat bounce in Applied Materials (AMAT) and Novellus (NVLS). For the lazy, puts on the SOX semiconductor index look attractive here. I usually avoid it as Intel is too big a part of the mix. I hate Intel stock, but it has a lot of supporters and that buoys the SOX. Still, at these levels, even the SOX looks like a layup longer term. 3. Slow growth or no growth is the long term outlook for the canine COMPUTER STOCKS, though Dell (Dell) seems well-versed in New Paradigm accounting and may still be able to juggle the books well enough to report growing earnings. Borrowing money to repurchase the stock doesn't seem to ring any warning bells in the minds of the bulls on this stock, so I will hold off on the long puts for now. When this dog crashes, it will not be a pretty sight, but the big bang is not likely to pop over the next few months. Compaq (CPQ) is in deep kimshee and is using the DEC takeover to cover the full extent of its problems. Start a put buying program over $30 on this Alpo eater. Gateway (what's with this name change? Do they no longer think they'll make it to 2000? GTW) is also very adept at accounting sleight of hand, and the "You're Stupid Ware" program may transport their earnings reports to a new level of blue smoke and mirrors. However, I own puts on GTW, as it doesn't take a rocket scientist to see that the real world, as reflected nowhere in company statements, is tough right now and about to get much worse. But when we talk of accounting games, every other boxmaker is a piker compared to IBM (IBM). The sharp pencils and the snake charmer charisma of the CEO has caused this stock to rise again on is likely to be another awful eps report. I am about to reconstitute my put buying program and just hope that Lincoln was right and all the people cannot be fooled all the time. Hewlett-Packard is a terrific company, but a very overpriced stock. I don't own puts right now, but tempt me more every uptick. The problem is, the worse the earnings HWP reports, the higher its stock rises. If they ever reported a good quarter, the stock would probably tank, but there is little chance of that in this environment. This company has a product for knee injury repair on the market and a crowded pipeline of promising formulations. 4. BIOTECH stocks are the last refuge of value in the technology sector. It is an example of a bubble industry years after the pop. Yes, I said nasty things about these companies when they were where the Internet stocks are today. But, now, a lot of good science is available at fairly low prices. As Cyndi Lauper sang, "Money Changes Everything." A bloated dog of a stock at $30 transforms itself into an intriguing butterfly at $7. In this case, there are too many great values to list them all. If you want to participate in a true contrarian play, H&Q Health Sciences (HQH) and H&Q LIfe Sciences (HQL) closed end sector funds are both selling at discounts in the high teens. Individual names I like include Genzyme Tissue Repair (GENZL). This company has a product for knee injury repair on the market and a crowded pipeline of promising formulations. It also has a parent firm with deep pockets and a stock price you need a microscope to find. Genzyme Transgenics (GZTC) is a pioneer in trans-species drug delivery systems, and their Frankenstein goats from New Zealand are attracting a lot of notice. They also have a deep-pocketed parent that looks a lot like Tissue Repair's sugar daddy. Ligand (LGND) is a money-burning son of a gun and has a toutier management than I prefer for my long, but the science is good, the pipeline is stuffed, they have blue chip pharmaceutical partnerships and a stock price that, as this is being written, is no longer a teeny-bopper. SangStat (Sang) has developed a generic version of the immune suppresant, cyclosporine, for organ transplant patients. Yes, Novartis will sue them, but that always happens to generic companies. The stock is a bit pricey right now, but buy on any dip. Shaman (SHMN) develops drugs using natural vegetation from the rainforest. The company was founded by and is run by women. If this sounds a bit new age and politically correct for you, I am in the same boat. However, they do have a drug in Phase III trials that controls Aids-related diarrhea. And the stock is selling for chump change. They just might make it, despite their precious profile. 5. Quick Takes. In game technology, I like Midway (MWY) at these low prices. In gaming technology, American Wagering (BETM) stock is cheap enough to be given away as a door prize at a casino grand opening. In communications technology, Ciena (CIEN) is a great put candidate. This stock reminds me of Novell and Netscape before the real world smacked them in the chops. In the same industry, can Shiva (SHVA) survive? I think so. Yes, I dragged their name through the mud a few years back, but that was when I was buying puts. They are nice guys at $8 and change. I am waiting for a few more points of upside before buying puts again on Ascend (ASND). I have been extremely lucky on this stock, both long the stock and long puts, over the past several years, and that success makes me leery of jumping in too soon this time. But the stock is starting to look pricey again." | ||||||||||||
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