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The Internet Financial Connection, January 14, 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: We apologize if you have received this newsletter twice. Apparently some subscribers did not the new edition due to server trouble and it is being sent out twice. -------------------------------------------------------------- This newsletter can be viewed at techstocks.com In This Issue: 1. Is The Internet Bubble Ready to Burst? 2. Network Associates 3. Sybron 4. Brightpoint 5. Interesting Articles On The Internet by Joe Dancy 6. Highlights on SI: by Tom Taulli 7. Disclaimer ---------------------------------------------------------- 1. techstocks.com Is The Internet Bubble Ready to Burst? Just when everything was looking fine and dandy in the Internet sector, Morgan Stanley's Internet ax, Mary Meeker (AKA "The Internet Queen") comes along and says, "We would like these stocks to sell off to release some pressure from the system they have helped create." Who is this lady to come in and take some of the pressure out of the Internet stocks? Yahoo! has gone from $240 last week to $445 this week, Amazon from $115 to $163, Excite from $43 to $77, Infoseek from $50 to $100 and so on. Now being serious, the Internet stocks are do for some sort of correction. After reporting earnings on Tuesday evening, Yahoo! opened at $335 on Wednesday, previously closing at $402, rose to $406 and then closed at $368 on the day. Even daytraders trying to trade that stock probably carry some sort of anti-ulcer medication in their pocket. About 7 weeks ago, the total market valuations of the top 20 Internet companies were worth under $100 billion. Now, the combined market capitalization of America Online and Yahoo! is alone worth $100 billion. If you assume that the stock market has about $10 trillion of value, $100 billion (7 weeks ago) does not really stack up to much, considering the Internet will revolutionize many things; advertising, retailing (e-tail), communications, you name it... etc. The same 20 largest Internet stocks now have a combined market capitalization of around $170 billion. With the current run-up in the Internet stocks, many small investors are the reason for pushing them up so high. They are simply looking for some exposure to the Internet. Some are blindly throwing money into stocks they know little or nothing about. A combination of things could happen. Even if there is a severe correction for the Internet stocks, I feel that it will be short lived and could be quick and painful. Average values could be cut in the range of 30% to 50% almost instantaneously. One of the reasons why they will rebound after a correction, and I do mean (rebound), is because the Internet is one of the few areas of the market that is guaranteed to grow excessively during the next 5 to 10 years. People like to buy companies that are in growing industries. This Internet frenzy still has legs. Small Investors as well as mutual funds want a piece of the action. Ron Insana of CNBC did a wonderful piece this week about how the stock prices from prior manias in the stock market are comparable to the current Internet mania. He noted that many stocks such as auto, radio, telephone and biotech stocks all at some point in time, had very lofty valuations and it took years for many stocks in those sectors to actually get back to prior highs. In many ways, I agree with him, but in other ways the Internet will continue to change the way we work, shop, communicate and we are still early in the game. Before you get ready to go in and buy you favorite Internet stock, just remember one thing. First, don't make Internet stocks a significant part of your portfolio just because it is the future. Second, if you are looking to buy these Internet stocks, don't chase them on the way up, wait for them to come to you. Third, at some point they will spill over like they are starting to do right now. Wait until the group makes a severe correction, such as decline as a whole in the area of 5% to 10% each day for several days. This is a common pattern for the Internet stocks. Fourth, buying leaders in a group is usually the best strategy (historically). For example, America Online (AOL 145 3/4) is a leader. They are an ISP provider, profiting from advertising and e-tail. Last I heard, they had about 15 million paying subscribers. They are actually receiving money from their users, unlike many Internet portals. If they can't make more in the field they are in, then no one can. They have the economies of scale to profit where it is hard for smaller ISP providers to make money. They are making money selling other goods and services to their users. Going forward, they will continue to profit and their stock will continue to rise. In the Internet portal area, Yahoo! (YHOO 368) is a leader in the area in which they operate. In addition to reporting record earnings, they announced that they had 35 million registered users in the recent quarter, up from 25 million last quarter. They have made and are making inroads to accumulate as many users as possible. Eventually, they will be able to leverage their business to their users buy offering e-tail and other services to grow their revenue steam. As noted above, buying a few leaders in the Internet area, when a correction does happen, is the best time to buy into that sector. The leaders generally have the staying power to weather a downfall and people tend to run to them in times of trouble or uncertainty. They are the safest "bets" in the Internet industry but, would only recommend buying them during sharp corrections. If you are looking for a service that offers the best news on Internet stocks, Steve Harmon of the Internet Stock Report offers a fantastic and comprehensive report on Internet stocks and the industry. His top 10 Internet stocks to watch were up 310% in 1998 and he recently posted his top 10 stocks to watch in 1999. Click here to go there. He also offers a free e-mail update. If you are interested in the Internet industry, his newsletter is a must. Mark Johnson Editor IFC ----------------------------------------------------------------- 2. techstocks.com Randall Williams-Gurian, Editor of Undervalued Stock Ideas, usistocks.com provides the following commentary. You may receive a FREE trial copy of his publication and details can be found at the above web site. His recommendations generated an average annualized return of 34%. An annual subscription to his newsletter is $125. He provides the following stock idea on Network Associates (NETA 54 5/8). Below is his write up. Network Associates (NETA) was formed in December of 1997, by the merger of McAfee Associates and Network General. McAfee paid $920 million to acquire Network General, completing the transaction using the pooling of interest method of accounting. Meaning, there is no goodwill to amortize as part of the acquisition, but the newly formed company must absorb all of the outstanding shares of both companies. The newly created company offers a full line of network products to its corporate customers, particularly those running the Windows NT operating system. NETAs' product offerings include; anti-virus, security, network management, and help desk software. These products are offered as a complete suite known as Net Tools. In addition, NETA offers consulting services to its clients, which in 1997, accounted for 17% of the company's revenues. Some of NETAs' more significant competitors include; Computer Associates, Remedy Corporation, IBM, Hewlett Packard, and Checkpoint Software. The network software industry is undergoing a considerable amount of consolidation, with NETAs' recent acquisitions. In August of 1998, NETA acquired Dr. Solomon in exchange for about $700 million in stock. Dr. Solomon is the leading anti-virus vendor in the United Kingdom and the acquisition should enhance NETA's presence in the region, as well as the rest of Europe. NETA also agreed to purchase Cybermedia, a leading software utility provider for about $130 million in Europe. NETA is benefiting from the explosive growth of the NT operating system sold by Microsoft Corporation. Microsoft is set to release version 5.0 of this product in late 1999. Microsoft NT software is targeted for the small to medium size business market, with aspirations of acceptance as software reliable and capable enough to run large computing jobs. Microsoft is betting its future on the NT product. Bill Gates' vision is to move all Microsoft customers to the NT platform, including individuals running Microsoft's Windows desktop operating software. By the year 2000, Microsoft will only produce a NT version of its operating software for running computers. This is fortuitous for NETA, as the company dominates the market for security, anti-virsus network management, and help desk software running on the NT platform. NETA maintains the leading market share in two of the areas of network management software. The company's Sniffer product has an estimated 76% market share of the software needed to manage and analyze high and midrange networks. NETA also dominates the market of anti-virus software with an estimated 60% market share. Both of these markets are expected to do well, as more and more companies move to expand their networks and more and more information moves across corporate networks. NETA trades at a reasonable multiple, especially given the prognosis for demand for its products. The stock currently trades in the mid 50s, or at about 30 times fiscal 1998 estimated earnings of $1.50. However, the stock trades at only 22 times next earnings estimate of $2.20, versus an expected 35% growth in revenues and earnings. In its most recent quarterly report, NETA reported earnings of 41 cents, a share excluding special charges on a 33% revenue rise to $242.4 million. NETA's balance sheet is clean, with no long-term debt and over $120 million in cash. If you are looking to purchase a network software company, with a dominant market position trading at a conservative multiple relative to its growth rate, then buy NETA at or below $60. We have set a one year price target of $100 for the stock. There is a thread that discusses NETA here on SI. Subject 5547 ------------------------------------------------------------------ 3. techstocks.com Mark Hoonsbeen of the IAI Regional Fund (800-945-3863) provides the following stock idea on Sybron (SYB 26). Below is the write up. Last July, investors became concerned about Sybron's internal growth rate. On these concerns, their stock went from $27 to a low of $16 3/8 in a few short months. One person who is not too concerned with Sybron's internal growth and has been buying their stock is Mark Hoonsbeen of the IAI Regional Fund. Sybron is a manufacturer of value-added dental and laboratory products. Click here to go to their web site for more information about what they do. Sybron is able to add growth and profitability by consolidating smaller companies. Initially, their focus was balanced between acquisitions in both markets but, lately the laboratory business has been a more fertile ground. Mark notes that Sybron's strategy is very positive for shareholders. Acquisitions tend to be immediately additive to earnings and provide excellent returns on the Company's investment. "The core growth in the dental and laboratory business is not very exciting, it's the wealth of acquisition candidates that makes Sybron an exciting story." Smaller manufacturers are finding it more difficult to compete. With the recent consolidation of distributors in both dental and laboratory markets, the economics of the business now favor larger manufacturers. "That means consolidation is being driven by the economics of the business. This is not another story built around a bull market. Sybron's management brings real value to shareholders," Mark states. Mark puts a lot of faith in management. "This is a very disciplined group. They have articulated a strategy and met the goals established consistently." Last year the stock came under preasure as the Company's internal growth slowed, Mark now sees these shorter term issues turning positive in conjunction with the continuation to the strong long-term cased for the Company. Sybron is estimated to earn $1.18 for fiscal year ending in September 99' and $1.40 in 00'. "Their stock is a good entry point for a long-term core holding." He thinks their shares can hit $35 to $40 within the next 12 to 18 months. --------------------------------------------------------------------- 4. techstocks.com Elliot Schlang of Lynch, Jones & Ryan Great Lakes Review (216-621-1330), provides the following stock idea on Brightpoint (CELL 16 5/8). Below is the write up. When the market started to turn down at the end in July of 1998 on concerns of the never then ending "Asian Crisis". Any stock that had exposure to Asia was dumped by investors. Brightpoint was no exception. Because of their Asian exposure, their shares went from around $17 in July of 98' to a low of $5 in October. Their stock has now rebounded back into the $17 area and Elliott Schlang of LJR Great Lakes Review thinks their stock could move higher. Brightpoint they are the fastest growing distributor of wireless handsets worldwide. About 19% of their business is derived from China and 11% of their business Comes from Latin America. Despite the fears of "Asian Turmoil", Brightpoint reported that their Asian business was up a whopping 44% in their 3rd quarter versus comparable 97' revenues. Elliott notes that because Brightpoint is only a distributor of cellular handsets, they do not carry the risk that manufacturers of the phones have. "They are not dependent on any one product and can distribute handsets from multiple handset makers... That is why I like Brightpoint so much!" Elliott figures Brightpoint will earn $1.09 in 1999. He adds that Brightpoint has historically traded between 7 and 58 times trailing earning. Elliot thinks their stock could trade at trailing PE of 30 sometime within the next 12 months with their shares hitting $27. There is a thread that discusses CELL here on SI. Subject 12068 ----------------------------------------------------------------- 5. 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 The shares of companies doing business on the Internet have given new meaning to the word volatility, featuring frantic trading of a small base of shares, heavy insider selling and press releases that contain more promises than profits. ''This may be the wildest bubble of the century,'' said David Dreman. iht.com Are methods of doing business over the Internet, known as electronic commerce, should be patentable? The debate rages. chicagotribune.com Individual online investors are credited with the run-up in Internet stocks; analysts predict the sector is near a fall. dallasnews.com MARKETS AND INVESTING The fate of President Bill Clinton will probably not affect financial markets and the U.S. economy much according to some - despite comments by his supporters otherwise. iht.com Stocks are overpriced by virtually any historical measure, the global economic crisis is still very much with us, and even the fate of the U.S. president is somewhat in doubt. .Most analysts are predicting the Dow will continue to lumber higher this year. dallasnews.com Stocks were riding an express train to the sky in the first week of trading this year, prompting speculation they will soon arrive at the next big milestone: Dow 10,000. bergen.com Here come the style police. Policing "style drift," the term the mutual fund industry uses to describe the intentional as well as inadvertent wandering off course of portfolio managers, is a hot topic these days. That's especially true given the soaring stock market and the preponderance of mutual funds that have stoked their performances with concentrations of a few well-known big-cap stocks despite investment philosophies that might suggest different courses of action. washingtonpost.com At least part of the explanation for the broad-based bull run is due to technical factors that occur every year, in what has come to be known as the January effect. herald.com SEMICONDUCTORS & ELECTRONICS | ||||||||||||
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