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This newsletter can be viewed at techstocks.com The Internet Financial Connection August 19, 1998 Presented by Mark Johnson, Editor of the IFC 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 :) -------------------------------------------------------------- In This Issue: 1. Tech Stocks Surge Again as Growth Wave Regains Strength by SI member TechnoWiz 2. PMC-Sierra, Inc. 3. Midway Airlines 4. Delta Woodside Industries 5. Interesting Articles On The Internet by Joe Dancy 6. Highlights on SI: Polymedica 7. Highlights on SI: by Tom Taulli 8. Disclaimer ---------------------------------------------------------- 1. techstocks.com TechnoWiz is a SI member and active participant. He provides the following commentary on technology stocks. Below is his write up. So far, this week is turning out to be one of the most important weeks in contemporary history. Readers of my 'Financial Intelligence' report, will know that comparisons of the '94 stealth bear market have been made to the experience of the last four weeks. At the end of 1994, the new highs new lows numbers were so shockingly negative, that everyone I talked to re the prospects of a huge rally, responded with the words: 'Impossible, under the circumstances, especially given the weight of such negative internals and breadth'. Well, we all know what happened next: The Dow embarked on a 2000 point non stop express, without so much as pausing for more than a 100 - 200 point correction along the way. The other key similarities to that time were that Wall St was almost universally negative. The market turnaround that began Monday has borne a quite distinct resemblance to the size and power of the liftoff that began at the end of 1994. Last week, I suggested we were close to sentiment levels that prevailed at the end of 1994 and warned that the massive reversal in sentiment that has taken place since the highs of last month, was historically almost without precedent. As the increasing amount of bearishness crept in, especially late last week and this past weekend, I reminded readers that when Wall St gets universally bearish, it's usually a precursor to a surprise rally that can be breathtaking at best. Another argument in support of this is, that when a market breaks straight from its highs as this one has just done, a knee jerk rally back to re-test those highs, is a technical requisite that somehow always manages in some way to play itself out. The last two days of strong upward action may confirm this is now happening. Many people may have been caught short and when a number of Mutual Funds chose to widely telegraph the fact that were as much as 30 to 40 % in cash it fulfilled the requirements and conditions that can fuel awe-inspiring up-moves. Advance indications of an impending upmove began to be seen late last week, when some emerging markets began to show signs of bottoming without waiting for Wall St to lead the way. The Yen also put in some efforts to trade higher and managed a rally of sorts. This Yen rally has continued to build upon itself this week and is a very important development for Wall St and the high tech industry. A strong recovery in the Yen will inspire confidence in the rest of Asia and may be enough to re-stimulate orders for US products. The slowdown in Asia this year has created a potentially huge backlog of orders for upgrades, new plant and equipment that sooner or later will have to be filled. What could cement a continuation of this rally would be a strong recovery in Asian markets and perhaps a major European bank following through on last week's rumors with a rich buyout offer for JP Morgan. As reported by the BBC over the weekend: "German invasion of Wall St? Rumors that Germany's biggest bank, Deutsche Bank, might buy J.P. Morgan lifted their shares on Friday". Click below for the full story: news.bbc.co.uk If Deutsche Bank bids between $160 to $200 per share for JPM, it would be a real big surprise if the value of other US banks were not to rise sharply in sympathy with such an unparalleled bid for a Dow component. Such a dramatic rise in JP Morgan's share price, should have sufficient positive effect to add fuel to the upward reaction now in motion. In addition to this, better than expected earnings results should continue to propel the chain of events that could be highly catalytic in nature to the strength of this up-move. As pointed out last week: Let's just suppose that had you had been completely incommunicado over the past month and then were shown a chart of say Intel, Compaq or some Internet stock, you wouldd be hard pressed to tell (from their robust performance), any thing bad occurred in the major market indices over that time. The continuing strength of the formerly weak Intel has surprised many observers. However, its recent strength is a true testament to the underpinnings that have enabled the Nasdaq index to remain the strongest of all, with good reason. What is really happening here? Since my mid-June article entitled: 'The Next Great Growth Wave', Intel has rallied from 65 to almost 90, CPQ has recovered from 27 to 35, Microsoft rallied from 84 to 120, Cisco from 80 to 105 and Internet stocks have soared beyond anyone's wildest expectations: Amazon.com has gone from 40 to the 140's and Yahoo and AOL have almost doubled, again! Why have these leaders been defying gravity? The chief reason is because the Internet continues to grow at a phenomenal rate and shows no signs of slowing. But, the real reason I wrote that article is because I firmly believe that 'Intranets' are going to be a large part of this next great growth wave. Now, in the past week the reality of this notion is beginning to take hold with an initial force that has already far exceeded my own expectations. Internet, (and Intranet stocks), have long taken off and now comes the announcement last week from the World's largest conglomerate, that GE plans to spend $5 Billion dollars to implement a Worldwide Intranet / Extranet network to service it's customers and integrate its offices around the World. If this is not the very strongest endorsement yet, that this new trend is not just under way but is poised for liftoff, I don't know what is. Six months ago, when Internet stocks were much lower and Intranet stocks were as yet undiscovered, I highlighted an article from the BBC entitled: 'Intranets poised for takeoff'. Those Investors who purchased shares of any Internet or Intranet favorites back then, for the most part have done exceedingly well and many believe that this is still just the beginning of another major trend. With this in mind, now perhaps, we can begin to understand why stocks like Intel have been holding up so well in a down market. $5 Billion in Intranet / Extranet expenditure buys an awful lot of Intel motherboards and Pentium II processors for all those Quads, Eights, Twelves and Sixteen processor servers that are going to be needed for this new gear. Not to mention all the other peripherals that will be required to complete this mammoth undertaking that eclipses all others in history. As expected, since the turnaround began on Monday, these stocks have again outperformed the rest of the market, and we now know why, many of the reasons. For over a year now, Intel has been in a range between 65 and 95. A breakout over 100 could produce a surprisingly strong rally that would probably eventually lead the rest of the market higher. We've seen this video before. It started in 1995 coincident with the launch of Windows 95. Remember how disc drive makers like WDC went from $10 to $50? Well, we may be in for something of a replay. The Disc Drive makers are already up 30% from their August lows, in a 'down' market. The launch of Windows 98 is bound to have a similar stimulative effect both in terms of new sales as well as millions of upgrades from ancient 3.1's and W 95's. With NT 5.0 not that far around the corner, a major upgrade of most office systems should keep things on the boil. In June, I wrote this editorial prior to the launch or Windows 98. Some excerpts: The Next Great Growth Wave After briefly reviewing how the accelerating hi-tech growth wave has unfolded since the beginning of the decade, I highlighted Intel's product transitions and how the confluence of the Internet, Pentium and Windows conspired to drive the incredible growth wave of the past three years. Asking what's next? The reply: Plenty more seems appropriate. Why? Because, we are really already well into the next transition to Pentium II and Merced. This in of itself represents another quantum leap in computing power, that will Integrate dynamically with Windows 98 and the explosion in bandwith that Internet Phase II is about to usher in with a vengeance. Add to that the rock bottom memory prices that now abound and a potent mix that can power 'the next great growth wave' has been formulated. There's even more: The next generation of powerful high speed memory chips is already close to reality offering up to four gigabits of Dynamic Random Access Memory, that's over 100 times the current standard. The combination of all of this, along with use of multiple ultra high definition monitors that the new Windows 98 software now enables, re-defines the workstation environment, is likely to provide a computing experience as yet unimagined by most. In a way one could describe the next great growth wave equation as a product of the 100 fold effect: 100 times early computing power, 100 times the original internet access speeds and 100 times recent memory standards. Now slash 80's prices by up to 90 per cent and affordability goes through the roof for the whole world. If you think the last three years saw growth, you haven't seen anything yet. The new programs and addons that are likely to be launched coincident with this new growth wave, along with the launch of Windows 98, T 5, improved browsers and unprecedented high speed internet access, is going to boggle the mind with a dizzying array of new choices. The power of Moore's law and its economics continue to astound and propel the computer boom that has already brought us this far this fast. This next growth wave is going to give us at least twice, if not three or four times the bang for our buck as the last one. That in itself is highly significant and helps to accelerate the product cycle way beyond anything we have ever experienced in history. This will bring unmatched affordability and power to a whole new generation of Internet and computer users that will number in the tens, if not hundreds of millions. That's the domestic potential. Now factor in the business requisites and consider the tens of millions of computers that are already beyond obsolescence, yet are still in operation all over the World and you begin to get the picture. How many of those computers represent certifiably incompliant year 2000 junk that is mandatorily replaceable. How many businesses all around the World need to get up to speed with the latest generation of programs, operating systems, Pentium II processing power and high speed connectivity to secured Internet and Intranets? Millions upon millions of upgrades and outright replacements required and soon. As I have said many times before, in business today, if your are not using state the art technology - your'e dead. This will only become more and more true, as we approach the new Century and businesses are forced to jettison out of date systems and decaying inventory. The current problems being experienced in Asia, may have temporarily delayed replacement, but this will eventually create a huge new demand from all manner of businesses and individuals who’ve had to delay purchases. If Dell computer's continued growth in Asia is anything to go by, it's already happening, in spite of all the alleged turmoil and currency problems. If you'd like to receive my 'Financial Intelligence' Email report, please send me a private message (you must be a SI member) Member 4185481 with the Email Address to where you would like it to be sent. ----------------------------------------------------------------- 2. techstocks.com Kevin Landis of the Technology Leaders Fund firsthandfunds.com, provides the following stock idea on PMC-Sierra, Inc. (PMCS 39 3/4). Below is the write up. PMC-Sierra, Inc. is the primary maker of semiconductor chips for the communications and networking industry. Kevin Landis of the Technology Leaders Fund, says that, "The next generation of Internet networks will be packet switched, which use ATM (Asynchronous Transfer Mode) integrated circuits. This is where PMC really leads... They are an Internet infrastructure stock." Most of the Internet traffic is carried over ATM networks. As the need for Internet bandwidth increases, so will the demand for PMC's chips. PMC's stock has been under pressure recently. Kevin notes that there have been several factors why their stock has been down from their high of $51 set back in late June. Two years ago, PMC said they would discontinue their old product lines and focus on being only a networking chip company. In order to avoid badwill with their customers, they decided to supply them with the older products, even though the margins for these products were not that high. "The demand for their legacy business was high but will be coming down." This generated the illusion of slowing growth. PMC acquired two companies which are not supplying a lot of revenues and earnings in the short term, but will be beneficial for longer term growth. They also hired many employees in order to meet future growth needs for their business. "To the untrained eye, they look like a company that is starting to faulter," he says, "In reality, they are making all the right moves that will benefit the future growth of their business." Kevin also points out that an analyst that covers PMC (who is a big bull on their stock), recently floated a rumor that they might have had a slow month in July. Kevin argues that PMC went into their recent quarter (starting in July) with 70% of their orders in hand. "Even if they had a slow month, they could still make their quarter without too much trouble." PMC has an impressive client list which includes Lucent Technology, Cisco Systems, Nortel, Ascend and Newbridge Networks. Kevin adds that PMC has established a leadership position with their customers and that their main driver is the Internet. "Even though there are unknowns about Internet traffic and who will win it. Internet traffic will continue to grow at an explosive rate." PMC is the largest position in the Technology Leaders Fund. Kevin first started accumlating their shares back in August, 1996 and has been adding to the position on the stocks weakness. He feels comfortable with this year end estimates of $1.16 and figures they will earn $1.60 in 1999 with their shares hitting $60 during that time period. There are threads that discuss PMCS here on SI. Subject 985 ------------------------------------------------------------------ 3. techstocks.com Jon Hickman of the StageCoach Strategic Growth Fund 800-222-8222, provides the following stock idea on Midway Airlines Corporation (MDWY 17 1/4). Below is the write up. Midway Airlines Corporation is an air carrier and serves 16 destinations in 8 eastern states and Mexico. Their hub is based in Raleigh-Durham International Airport. "Midway's earnings have been terrific, they have done everything they said they would do since they went public last December," says Jon Hickman of the StageCoach Strategic Growth Fund. Everything has been going great for Midway. On July 29th, they reported 2nd quarter earnings of $0.54 vs. earnings of $0.40 last year. On August 11th, they reported that their load factor for passenger traffic increased 24% from the previous year. So, why are the shares of Midway's trading in the same area they were at the beginning of January? Jon notes that the whole industry is doing well and this is one of the small cap companies that has not been recognized by Wall Street yet. Midway has an advantage over other competing air carrier's. All of their planes are the same so, maintenance and pilot training costs are lower than other airlines. Some other smaller airline carriers, such as Atlantic Coast Airlines Holdings Inc. and Skywest Inc., which are larger than Midway but small when compared to the overall airline industry, trade at 15 times and 16 times next years earnings estimates (respectively) while Midway trades at 9 times Jon's 1999's estimated earnings of $1.90. He figures they can grow in the 30% area over the next few years and see's them trading at 18 times 1999 estimates with their shares hitting the mid 30's sometime over the next year. Steven Westberg, senior Vice President and CFO at Midway feels comfortable with Wall Street estimates. "Traffic has been great, we are growing nicely, and we have one of the youngest jet fleets... The average plane in our fleet is 3 years old," says Steven. --------------------------------------------------------------------- 4. techstocks.com Vincent Sellecchia of the Delafield Fund delafieldfund.com, provides the following stock idea on Delta Woodside Industries (DLW 5). Below is the write up. Delta Woodside Industries has been a disappointment for many of their shareholders. Their stock was trading in the $12 area back in August of 1994 and has slowly slithered downward since then to the $5 area currently. Delta owns and operates essentially five primary businesses. There is a woven's, t-shirt, apparel, knit fabric and Nautilus (fitness equipment) division. A few months ago, Delta made a decision to exit their knit and Nautilus business because they have been losing money. They are in the process of liquidating their knit business and trying to sell their Nautilus business. Delta's total outstanding debt at the end of the 3rd quarter was $234 million. At the end of the 4th quarter (ending June 30th), it was $194 million. "They will continue to take debt down sharply," says Vincent Sellecchia of the Delafield Fund, "They have paid down quite a bit of debt in the 4th quarter and will pay down a significant amount of debt in 1999 once their two businesses are completely sold off." Delta's wovens business had revenues of $340 million for fiscal year 1998 (ending in June). That business earned $46 million for them. Their t-shirt business had $105 million in revenues and is in the process of moving their capacity offshore in order to cut costs. Vincent notes that business has been losing money but thinks it will return to profitability in 1999. Their apparel business which goes by the name "Duck Head," had revenues of $85 million in fiscal 1998 but Vincent thinks they will have revenues of $100 million + in 1999, with margins in the mid single digits. He figures that Delta will earn $1 in 1999 and has the potential of hitting $10 during that time period. ----------------------------------------------------------------- 5. techstocks.com Joe Dancy 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 MARKETS & INVESTING The single most important factor in investing is time. It's not stock-picking and certainly not market timing -- trying to guess the short-term direction of stocks. The trick, if you can call it that, is to buy a piece of a great corporation and become a partner in its growth over a long, long period. washingtonpost.com Once again, the managers of large amounts of money -- and not the millions of individual investors -- are the culprits in the latest stock market sell-offs. herald.com Small-company stock funds, which have been among the market downdraft's biggest victims, are shaping up as one of the most intriguing areas to rejigger, say advisers. herald.com ASIA, JAPAN & RUSSIA Export flows to the Far East begins to slow - while imports pile into the U.S. chicagotribune.com Japan's economy will likely contract 1.7 per cent this year, though it could start to recover in the second h alf if the government moves ahead with plans to stimulate growth, the International Monetary Fund (IMF) said. straitstimes.asia1.com "Black Thursday" hits for the Russian financial markets. chicagotribune.com Trading in Russian stocks was temporarily halted because of a sharp selloff by investors fearful that the economy is not strong enough to withstand capital flight in emerging markets. globe.com The Russian government moved hastily to avert financial collapse with a series of drastic measures, including delaying payments for 90 days on foreign debt owed mostly by banks, a restructuring of government bonds and the sacrifice of the ruble to market forces. mercurycenter.com Russia's ruble devaluation, just a month after promises of an additional $22.6 billion from the International Monetary Fund, dramatically underscores that the United States and its rich allies are rapidly running out of solutions to halt a deepening global economic crisis. herald.com The Global Economy is careening toward disaster, and the Clintonites seem clueless about how to stop it. mercurycenter.com ECONOMIC A small but growing number of economists and market experts are beginning to worry about the danger of a "wealth shock," in which a sudden drop in share prices spooks investors, prompting them to sharply rein in spending. washingtonpost.com Asian crisis limiting Fed's ability to raise interest rates globe.com As the worldwide economic crisis looms larger, analysts say the only way to avoid a major explosion is to move to lower interest rates in the world's major economies. canoe.com Global forces driving taxes on savings down towards zero. independent.co.uk While generalized price declines have not been seen since the 1930s, the smell of deflation is now strong enough to make it worth thinking about how standard economic operating procedures change when selling prices start to fall. boston.com Analysts: Economy not tied to fate of President Clinton dallasnews.com Y2K A test simulating trading on Wall Street around the start of the millennium showed that some firms with the best resources to overcome year 2000 computer problems couldn't handle the transactions smoothly. triblive.com ----------------------------------------------------------------------- 6. techstocks.com Sam is an active participant on the The Stock for 1998 (Polymedica) PM (Diabetic Supply Co.) thread here on SI. He provides the following commentary on PolyMedica (PM 9 5/16). Below is his write up. "My creativity seminar company, The Idea Network, teaches individuals and companies how to become leaders in their field. I have been asked by Silicon Investor to discuss Polymedica (PM- Amex). I am going to discuss the company in terms of the lessons taught in the seminar. The way to become a leader is simple: figure out who is in the parade, who in the parade your company can serve, where the parade is going, which parking lot to run across to get in front of the parade and finally how to delight your parade so you can stay in front. | ||||||||||||
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