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The Internet Financial Connection, July 17, 1999 -------------------------------------------------------------- To Subscribe: Send a blank email to <mailto:ifc-subscribe@topica.com> Please tell a friend about this newsletter :) -------------------------------------------------------------- !!! ATTENTION INVESTORS !!! Try Investor's Business Daily FREE for two weeks. Investor's Business Daily -- a proven way to get the best stock, options, and commodities information you need, every business day. Click on the link below ibd.infostreet.com to begin receiving Investor's Business Daily. There is no commitment and you will enjoy two FREE weeks of Investor's Business Daily delivered to you every business day. "One of the best sources of financial information available!" Mark Johnson Editor of the Internet Financial Connection. ibd.infostreet.com ------------------------------------------------------------- This newsletter can be viewed at techstocks.com In This Issue: 1. Can Technology Stocks Keep Going Up? 2. Analysts International & PSC Inc. 3. Telephone & Data Systems 4. Veritas Software 5. Interesting Articles on The Internet by Joe Dancy 6. Disclaimer ---------------------------------------------------------- 1. techstocks.com The technology based indexes have been on a roar! The NASDAQ Composite is around 2,850, up from the 2,500 level in mid June and up from the 1,400 low made last fall. The Morgan Stanley HI Tech Index (MSH) has moved from the 1,000 area and is approaching and ready to surpass the 1,250 level any day. Note that the MSH was trading at the 450 level only a year ago. Large cap companies such as Microsoft, Cisco, Intel and Dell that make a majority of the market technology indexes because of their rather large market caps have had rather a mixed picture year to date. Microsoft and Cisco are both up close to 40% this year, while Intel and Dell are both up around 10% so far this year. Those four "large horseman", still regarded by many as the markets "best", is seeing a divergence in returns when compared historical returns. All of them have traditionally gained 100% or more a year. Intel and Dell are experiencing pricing pressures because of increased competition in the semiconductor and computer manufacturing areas. Microsoft, on the other hand, is benefiting from the increase in PC sales. Since they have a dominant position in the desktop software space, they are not seeing margin erosion or threats from competition. Cisco is in somewhat the same position. They are the leading supplier of routers and are experiencing superb growth as a result of the Internet. Their margins are fat and they basically control the industry they are in. I find it interesting that a company like Microsoft and Cisco, the ones that control the industries they are in, provided the best returns to investors. (When analyzing the largest high tech companies.) Going back to the technology indexes, both the NASDAQ Composite and the MSH are up roughly 30% year to date. Yet, the larger stocks or the ones noted above are barely beating the indexes or are not keeping up. The larger cap companies are starting to lose a little bit of steam and presently, it is the smaller companies that are starting to lead the way. These small companies inside the technology indexes are helping to push those index's up. In the short term, the tech indexes will continue to go up from present levels. The question is how much? Movements in the technology sector have traditionally been gyrated by chaotic price swings. As money continues to pour into the technology sector, the sharp increases in many technology related companies will be followed by a sell off in the technology sector. The short term traders, momentum investors and profit takers will come in at some point and sell. My models indicate that in the short term, 3,000 area for the NASDAQ Composite and 1,350 for the MSH are points that those indexes may touch or have trouble touching. After the NASDAQ and MSH come near, touch or even surpass those levels, the technology area will begin to sell off and the market will look for reasons to sell. Every year, the technology area finds some reason to sell off 15%+ and so far this year, it has not happened. One could argue that the Internet area corrected significantly, in many cases 50% or more for large Internet names such as Yahoo! or even America Online, and that was the technology sectors correction. In any event, I believe that the technology area will correct at least 10%+ from their highs sometime within next few months. When that happens, I believe that will provide investors with a great buying opportunity! Buying stock in great companies when the market corrects is the best time to do so. Going into next year, the technology area will be very strong. Corporate America will upgrade and/or buy new technology "things". Earlier this year, some of the technology spending slowed by Corporate America and they focused their attention and money towards fixing the Y2K problem. Most companies have finished or are finishing up their work on the problem and will begin to spend money on new technology items later this year and in early 00'. Microsoft will be rolling out Office 2000 and Windows 2000 early next year and that will further drive technology spending. Typically, when people upgrade their existing technology, such as software or even PC's, that spending effect is felt by the entire technology industry. Technology spending in the fourth quarter of the year is always the strongest. A strong 4th quarter, along with a strong outlook for technology in early 00', bodes well for the entire technology sector. If you are looking to buy technology stocks, your best choice may be to wait for the market to come to you, instead of chasing it on the way up. Keep some cash for a rainy day and buy on the dips. Cisco (CSCO 66 1/2) is on the top of my list of stocks in the technology sector. They are estimated to earn $0.92 for fiscal year ending July of 00', versus earnings of $0.74 in 99'. I will admit, their stock has a very high PE. Waiting for their stock to pull back or buying on weakness may be your best bet. Cisco is literally supplying the picks and shovels to fuel the growth of the Internet. Buying their stock is one of the safest ways in playing the Internet space. Speaking of the Internet, the Internet stocks have been taken out and beaten somewhat. Finding the right Internet companies to invest in can be tricky. Many valuations of the Internet companies are rather high. America Online has a market cap in excess of $130 billion and has revenues of about $4.5 billion for their fiscal year ending June of 99'. Yahoo! should post revenues of around $500 million this year. Yet, they have a market cap of well over $30 billion. If you do decide to dabble in the Internet space, I highly recommend that you stick to leaders. This fall, e-tail (e-commerce) will be hyped by the media and will once again be the focus as it was last year. According to research by eMarketer, the number of people online globally will be 130 million in 1999. By 2003, the number is expected to be 350 million. They also predict that e-commerce revenues are expected to grow from $98.4 billion in 1999 to $1.2 trillion in 2003. That's one heck of an increase! There are Internet companies that are leaders in their space and will directly benefit from e-tail. America Online (AOL 121) has the largest user base of any online ISP. They charge a monthly fee to their users by credit card and have a steady stream of revenues to their users. Online advertising is starting to ramp up and AOL has and will become a direct beneficiary of that. AOL is making inroads globally. Their infrastructure has been built and profits will continue to flow in. I expect AOL to increase 4 fold within the next 3 to 5 years, based on an increase in direct marketing to their users, which will result in more advertising revenues and profits. As mentioned above, they collect a monthly fee. They keep the Internet simple and they know how to run a business. Yahoo! (YHOO 154 1/2) is another Internet company that has a very high valuation but has a good future ahead of them. Their margins are comparable to Microsoft's. Yahoo! has low overhead costs. Most of their revenues are derived from advertisers but, they will soon make inroads into e-tail. According to Yahoo!s' most recent quarter, they boast 310 million page views per day, 80 million unique visitors, and 65 million registered users. There is power in numbers. With one of the largest base of users out there, they will be able to market to and collect more revenues as their number of users increase. Whether it is signing up for a credit card or selling items online, eventually, Yahoo! will figure out how to maximize their potential and directly market goods & services to their users. If the Superbowl game can command a few million $$$ for a 30 second spot, imagine what Yahoo! will be able to rake in once the whole world is hooked up to the Internet. Yahoo! is the leader in making the Internet simple and easy to use. Yahoo! should post around $500 million in revenues in 99' (as mentioned above) and over $1 billion in 00'. They will take their business to the next level and expand their frontiers in both revenues and in new forms of media. The best thing about AOL and Yahoo! is that they do not have to keep a physical inventory of goods and will benefit from the growth in e-tail. Whether a product is sold at a profit or loss, they will receive fees from advertisors pushing goods & services on the Internet. They simply benefit because, they have aggregated a large number of users, and they leverage that power to directly advertise to them. In AOL's case, they collect a fee from their users in doing so, what a wonderful business model! In closing, AOL and Yahoo!, even at their lofty valuation levels, are the best ways to directly play the Internet space. Later this year, when the hype and mania of the upcoming e-tail Christmas season kicks off, those companies will be the center of attention! Mark Johnson Editor IFC ----------------------------------------------------------------- 2. techstocks.com Jean-Pierre Conreur of the Tocqueville Small Cap Value Fund tocqueville.com , provides the following stock ideas on Analysts International (ANLY 14) and PSC Inc. (PSCX 10). Below is the write up. Jean-Pierre Conreur of the Tocqueville Small Cap Value Fund prefers to buy stocks in companies that are substantially down from their high and have been trashed by Wall Street for one reason or another. Typically, the stocks Jean-Pierre initially selects for his fund are down 50% or more from their all time high and he prefers to hold them on average for 3 to 5 years. One company Jean-Pierre owns and favors at the moment is Analysts International (ANLY). They offer a wide range of billable computer software services under long term contracts. For example, they provide consulting, project management, systems analysis, and software maintenance and training services. Their stock hit a high of $31 last September and then fell to a low of 8 5/8 back in February. It is now trading in the $14 area. "Their business slowed down because of Y2k issues and because of cutbacks in corporate information technology (IT) spending," says Jean-Pierre. "ANLY is able to manage costs easily because 90% of its revenues are from billable hourly sources... It is becoming increasingly common for organizations to outsource their information technology and software requirements and this is what ANLY does." Jean-Pierre believes that ANLY will be able to grow earnings in the 15% to 20% area, annually over the next several years. He estimates that they will earn $1.15 in 2000' (ending in June) on revenues in excess of $650 million. "ANLY's stock has historically traded at one to two times sales." Based on that historical valuation Jean-Pierre figures their shares have the potential to hit the mid 20's sometime within the next 12 to 18 months. Another company Jean-Pierre currently owns and likes is PSC Inc. (PSCX). They manufacture hand-held bar code scanners and other productivity enhancing applications used by grocery stores and retailers. They have recently introduced a new product called U-Scan, meaning you scan your purchases yourself, and pay with your credit card or cash. Instead of one cashier running through all of the items at an express lane at a grocery store, one cashier can now supervise and control up to four express lanes at a time using four U-Scan terminals. Patrons shopping in the store will scan through the items which they bought, and then weigh them on a scale. A computer will keep track of what the total amount of the purchase should weigh. The system uses a unique approach for checks and balances, and if there is a difference between the calculated weight and the actual weight, the customer will be sent to a standby station where goods being purchased can be examined more closely. A few grocery store chains such as A&P and Kroger have implemented PSC's self scanning terminals in their stores. "PSC's scanning terminals have been successful at both of those stores," states Jean-Pierre. Wal-Mart is currently testing PSC scanners in a few of their stores. "If Wal-Mart decides to roll out U-Scan chain wide, it could become a significant killer application for the entire retail industry as other retailers emulate the Wal-Mart roll-out." Even without Wal-Mart signing on as a major customer, Jean-Pierre figures PSC should earn $0.95 in 99' and around $1.15 in 00', with their shares hitting $20 within the next 12 to 18 months. There are threads that discuss ANLY and PSCX on SI. Subject 14339 Subject 21432 ------------------------------------------------------------------ 3. techstocks.com Ivan Arteaga of the Gabelli Global Interactive Couch Potato Fund provides the following stock idea on Telephone & Data Systems (TDS 77). Below is the write up. Telephone & Data Systems (TDS) was first mentioned in this column back in October of 98'. Their shares have gone from $39 to just over $70 since then. Ivan Arteaga of the Gabelli Global Interactive Couch Potato Fund thinks their stock has room to further move on the upside. TDS is a diversified telecommunications holding company that has operations in the local telephone, cellular and PCS business. "From a value point of view, TDS is worth much more that the market is currently valuing their shares," says Ivan. He explains that for every one share that TDS has outstanding, that one share controls about 1.1 shares of U.S. Cellular (USM) (TDS owns 70 million shares of USM), which is worth about $59. TDS also owns close to 60 million shares of Aerial Communications (AERL). So, each share of TDS controls about one share of Aerial, which is worth around $13 1/2 per share. Ivan adds, TDS owns a telephone company, which is not publicly traded, should post revenues of $490 million in 99'. He figures their telephone business should be valued close to $2 billion or about $40 per share of TDS. "With all of the pieces put together I believe TDS is worth around $110... I think TDS' shares will reflect that value within the next two years... The combined businesses are growing in excess of 15% annually," states Ivan. There is a thread that discusses TDS on SI. Subject 29271 ---------------------------------------------------------------- 4. techstocks.com Randall Williams-Gurian, Editor of Undervalued Stock Ideas, usistocks.com provides the following commentary on Veritas Software (VRTS 53 1/4). Undervalued Stock Ideas is a quarterly publication that specializes in technology stocks. An annual subscription to his newsletter is $125. You may receive a FREE trial copy of his publication and details can be found at the above web site. Below is his write up. Veritas Software designs, develops and markets enterprise storage management and high availability software products that manage both online and off-line data for business critical computing systems. Veritas also offers a complete line of software products necessary to implement Storage Area Networks (SANs). SANs manage data dispersed over heterogeneous storage environments and networks. Since its founding in 1982, the company has grown to over 2,300 employees residing in 17 countries. Veritas' major customers include both OEMs and end users. Some of the more significant customers include Compaq Computer, Sun Microsystems, Microsoft, AT&T, EBAY, America Online, E*Trade, Lucent Technologies, Motorola, Amazon, and Boeing. Veritas' major competitors include Storage Technology, Lagoto Systems, EMC, Computer Associates, Microsoft, IBM and Sun Microsystems. Veritas is the industry leader in storage management software. Veritas is able to hold this honor because of its aggressive acquisition strategy and the unique functionality of its products. Over the last year Veritas purchased Veritas Seagate's NSMG storage software business and completed its acquisition of TeleBackup Systems. The Seagate deal, a pricy $3.1 billion based on the closing price of Veritas stock on March 31, 1999, allows Veritas to expand its market to NT computing platform. Prior to this purchase Veritas offerings included storage solutions mainly for the UNIX market. Initially Wall Street frowned on the deal and investors dumped the stock. The stock has since recovered and now trades near its all time high. TeleBackup has a strategic fit as well. TeleBackup is a Canadian Corporation that designs, develops and markets software solutions for local and remote backup and recovery of electronic information stored on networked, remote and mobile personal computers. Veritas products improve system performance, availability and manageability while reducing the cost of administration. Veritas products network administrators to back up data without shutting down the system, a highly desirable feature for global companies requiring networks to be available 24 hours a day. In addition, Veritas products are more efficient as the software has the feature to identify only the data that has changed for back up purposes. The numbers behind the Veritas story are impressive. The company reported revenue growth of 84% in its first quarter ending March 31, 1999. Operating earnings raced ahead 86% to 26 cents a share. More importantly, the company achieved gross margins of 88% and operating margins of 27%. We expect Veritas to generate $350 million in sales in 1999 with earnings of $1.20. Veritas could earn $1.65 in 2000 on revenues of $550 million. Their stock is expensive trading at 75 times 1999 estimated earnings and 55 times 2000 earnings. We typically shy away from stocks trading at these lofty levels. However, the story with Veritas is simply too compelling. We expect the company to beat our earnings numbers and to post even better revenue gains than the ones mentioned above. The market for Veritas products is growing explosively. The company is working with some of the biggest players in the industry. We are setting a conservative one-year price target of $75 on the stock. There is a thread that discusses VRTS on SI. Subject 2281 ----------------------------------------------------------------- 5. techstocks.com Joe Dancy, co-editor of the IFC and editor of The Lone Star Growth Investor members.aol.com and and manager of the LSGI Technology Venture Fund, 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 Lehman Brothers, the lead underwriter of China.com's Nasdaq listing, has defended the Internet portal operator's high valuation on its first day of trading. technologypost.com Sony plans to begin an electronic money service on the Internet in 2000, according to the Nihon Keizai Shimbun (Nikkei). Under the system noncontact IC cards, similar to debit or smart-cash cards, and special reading devices will be provided for customers. techweb.com IF AT&T's Mike Armstrong is scaling back his company's scope to impress the Federal Communications Commission, he probably doesn't have to worry. FCC Chairman William Kennard told The Post here that regulators will keep an eye on AT&T's clout, but he strongly endorses the company's efforts to build the nation's broadband system. nypostonline.com Ebay Inc., the number one on-line auctioneer, this weekend was hit with its fourth system failure in a month. An announcement on the San Jose, Calif.-based company's Web globe.com They're called the E-gang: the squeaky-clean dozen most likely to transform the online world over the next year. The new issue of Forbes magazine picks twelve mavericks who are rewriting the rules of the web, and includes some fascinating choices. nypostonline.com Even as Internet retailers head into the slower months of summer, the rapid growth of electronic commerce should drive solid quarter-to-quarter revenue gains for most online merchants. ``Growth is overwhelming any seasonal trends,' said BancBoston Robertson Stephens analyst Lauren Cooks Levitan. mercurycenter.com Either out of ambition or fear, most major newspapers have rushed to create an on-line presence. Now the question is: how to turn a profit? The fact is that almost none of them do right now, with few having an idea of what the successful on-line publishing model will turn out to be. technologypost.com TECHNOLOGY AND SOFTWARE Revenue for the worldwide storage-management software market will increase dramatically, from $2.6 billion in 1998 to more than $6.6 billion in 2003, said market researcher Dataquest, a unit of Gartner Group. techweb.com MARKETS AND INVESTING With stock ownership at an all-time high, House Republicans proposed Wednesday to cut the top tax rate on capital gains from 20 percent to 15 percent. detnews.com Charles Schwab Europe has over 26,000 online accounts, and has had more than 100,000 Internet trades -- worth 530 million pounds ($828.5 million) -- in the last year, the company said. techweb.com Merrill Lynch President and Chief Operating Officer Herb Allison unexpectedly resigned yesterday, raising questions about the firm's long-term strategy and management succession. nypostonline.com The Internet-stock buying frenzy that is making scores of entrepreneurs overnight millionaires spells trouble for company executives John Jackson and Kenneth Moch. Both run New Jersey biotechnology companies. Neither has had much luck recently obtaining research dollars. bergen.com The moral of North American stock markets for the first half of 1999 is simply this: Never, never, never underestimate those high-flying "new economy" stocks. canoe.com The latest report on the ``digital divide' from the U.S. Department of Commerce says that while millions of Americans continue to venture into the wired world for the first time each year, significant gaps remain between the nation's information ``haves' and ``have-nots' -- gaps that continue to fall along racial, income and education lines. mercurycenter.com ECONOMIC The World Trade Organization warned the U.S. that any broad move to restrict imports could harm the nation's economic expansion, which relies on free trade to ease strains on labor and production. detnews.com James Carville, the architect of President Clintons 1992 victory, has been advising Eduardo Duhalde, an Argentine presidential candidate. Duhaldes threats of default led to this weeks crash in his countrys bond and stock markets. That means that Mondays loss alone would add another $350 million or so to the total cost of the new debt. nypostonline.com The euro, Europe's single currency, has nose-dived, weighed down by sluggish growth here compared to the booming United States. It also is suffering from conflicting signals from European policy-makers about how low the currency would or should be allowed to go. Economy: Euro loses luster, down 15% since its January debut. detnews.com Now that the Federal Reserve has gone ahead and raised interest rates - jump-starting a lethargic stock market in the process - investors are turning their attention to second quarter earnings. dallasnews.com Gold's status as the ultimate store of value is fading, and miners in gold-producing nations are suffering from the effects of its plunging price. A global gold sell-off, hastened by the Bank of England's auction of 3.5 percent of its reserves last week, has sent prices down to their lowest level in a generation, triggering bankruptcies and street protests in South Africa and spreading gloom among miners from Uzbekistan to Nevada. detnews.com Japan's government and central bank remained cautious on Monday about hopes for a long- awaited economic recovery, with the Bank of Japan signaling that it would continue its ultra-easy monetary policy. detnews.com ----------------------------------------------------------------------- 6. techstocks.com DISCLAIMER: All information contained on this page are from the authors cited. The information is believed to be reliable but there is no guarantee to its accuracy. Stock ideas presented by mutual fund managers, money managers, newsletter writers and SI participants may be bought or sold by them anytime before or after being presented in this newsletter. Anyone purchasing the stock ideas above should consult a financial advisor before doing so. The stock ideas mentioned above are not solicitations to buy or sell but to provide people with information from many sources. I (Mark Johnson editor of the IFC) am not paid any fees by the above writers nor by the companies represented. The stock ideas may represent a starting point for investors. People are encouraged to do their own homework before buying any stock. Neither Silicon Investor or the Internet Financial Connection will be responsible for any loss occurring from the purchase or sale of the above securities or any securities. ========================================================================= To Subscribe: Send a blank email to <mailto:ifc-subscribe@topica.com> Please tell a friend about this newsletter :) | ||||||||||||
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