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The Internet Financial Connection, October 30, 1999 Since the beginning of July 1999, the average stock (225 stocks were included in the results) mentioned in the Internet Financial Connection in 1998 was up an average of 51.4%. Click the link below to view the results. Subject 30843 Presented by Mark Johnson, Editor of the IFC -------------------------------------------------------------- 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 siliconinvestor.com In This Issue: 1. Micro-cap gunslinger blows the competition away! 2. California Amplifier & Fossil Inc. 3. Zales Corp. 4. CenterSpan 5. Interesting Articles on the Internet by Joe Dancy 6. AMIDEX35 Fund 7. Disclaimer ---------------------------------------------------------- 1. Micro-cap gunslinger blows the competition away! siliconinvestor.com Mark Johnson, Editor of the Internet Financial Connection, provides the following interview with William Edwards of Palo Alto Investors pa-investors.com. AudioInvestor.com provides an audio version of the interview. Click the link below theaudioinvestor.com if you would prefer to listen to the interview. Below is the write-up. Q: Will, the small-cap stocks have posted poor results when compared to the larger stocks. Can the small-cap area ever recover? A: Yes, small-cap stocks will once again outperform. They normally outperform larger companies, and the fact that they've lagged since 1993 (almost six years) is highly unusual. When they might recover isn't clear. What is clear is that they are distinctly undervalued compared to big caps. The more undervalued they are, the bigger the rebound will be when it comes. We've seen what we believe are the first signs of the closing of the value gap... we've had a large number of our little companies acquired by bigger companies in the last nine months. We've had six public companies announce mergers or buyouts so far in 1999, in a portfolio that started the year with just 18 public holdings. Q: Since your focus is on the micro-cap segment of the market could you describe your investing philosophy and how you go about selecting stocks? A: Our goal is to make money for our clients. We feel that the best way to do that is to focus on the least-efficient segment of the market, which to us is the micro-caps. There are very solid economic reasons for most players in the financial community to avoid the area. As a result we see very little competition. Since there is very little competition we believe the micro-cap segment will continue to be potentially very lucrative if you can deal with the liquidity risk and lack of good research coverage that are endemic to the segment. Q: Since 1990, Palo Alto Investors has generated an annual return of 26 percent net of fees compared to 17 percent for the S&P 500 and 11 percent for the Russell 2000. Is there anything else you can share with us about how you produce these wonderful returns? A: The key to our success is our original fundamental research. We do extensive work on all of our holdings before we invest. We study the financials, meet the management, call their customers and competitors... everything we can do to develop a logically consistent and complete picture of the company. Liquidity is so poor in the micro-cap segment that you can't count on the market to bail you out of your mistakes, so it's very important to be correct going in. Also, we invest only in companies that we feel have the potential to become more than a Micro-cap. We are very selective... we only buy 1 in 20 or 1 in 30 companies we investigate. But once we decide to buy we aren't afraid of taking a big position and holding a long time. Our extensive research gives us courage in our convictions. We also have another distinct advantage. In this business you are only as strong as your weakest client and our clients are very strong. Our clients sign multi-year commitments, which gives us the time we need to deal with the liquidity issues and turn liquidity from an issue into an ally. Since we can look past the next quarter or two, we can buy companies facing temporary difficulties that due to lack of liquidity have fallen to incredibly low prices, yet other institutions can't buy or hold since the timing of their recovery may not yet be clear. Q: Does the technology theme play a significant role in the companies that you invest in? If so, what technology-related companies do you like or presently favor? A: Technology is an enormous driver of innovation and growth. Most of our holdings are beneficiaries of trends in technology if not actual technology companies. Perclose (PERC 47 1/2), SDI (SDIX 7 3/4), and Broadvision (BVSN 66 3/8) are currently our three largest holdings. We think that both medical and information technology are very fertile areas for micro-cap investing. Q: Why do you like those companies? A: All have proprietary products that enable users to do an important job better, faster and cheaper. Perclose is trading around $47, and Abbott (ABT) will buy them for over $52/share in stock later this year (1.35 shares of Abbott). Perclose's product closes the holes surgeons make in arteries to access the heart for minimally invasive surgery. SDI makes hand-held test kits that test for GMOs (genetically modified organisms) and other important environmental traits in minutes for a few dollars, instead of hours in a lab for hundreds of dollars. Broadvision makes software that allows big, sophisticated computer users to make use of the Internet in ways that make their clients much happier and saves the company a lot of cost and time. Q: What other favorite holding do you own and why do you like them? A: Embrex (EMBX 8 1/4) is another large holding. They inoculate broiler chickens while still in the egg... much cheaper and more efficient than waiting for them to hatch. They have numerous patents, huge cash flow, and 85 percent of the U.S. market, yet they trade at just $7 3/8/share, which is below their 1991 offering price when they had no revenues, no clients and few patents. They trade at less than 10x expected earnings and are growing earnings at well over 20 percent annually. They have little debt, excess cash and are trading at just 5x EBITDA. Q: Are you directly or indirectly playing the Internet space? A: Yes... mainly indirectly. We think the Internet has enormous potential going forward. It's a confusing, fast-moving industry and we feel it's likely we'll see lots of micro-cap opportunities in the Internet sector going forward. We currently track well over 300 Internet companies. Q: Are there any companies that you like that we may have missed? A: Tons of them. We think that there are over 10,000 micro-cap companies in the U.S. alone. There are hundreds of fascinating, growing little companies out there just waiting to be discovered. Q: If there are renewed fears of inflation or more interest-rate hikes, how will that effect the small-cap stocks? A: Small-caps frequently have lower P/Es than the S&P 500, which I find silly since I also feel they generally have better growth prospects... the market just isn't reflecting that growth in their share prices currently and they tend to have less debt. So I personally feel that in many cases they'll be less affected than the big, mature, leveraged companies you see in the Dow and the S&P. However, some weaker small companies could be destroyed by a tougher environment. Selectivity is key. Q: Will, are there any comments you would like to include before closing, about Palo Alto Investors or about investing in Small Cap Stocks? A: The last six years have been tough for micro-cap investors, so tough that Lipper eliminated micro-cap as a fund segment. I believe that the few remaining players in the micro-cap segment have outstanding prospects, particularly relative to the large-cap stocks that the investing world is so strongly focused on. It's impossible to say when or how things might change, but we are cautiously optimistic about the future. Thank you, Will! ----------------------------------------------------------------- 2. California Amplifier & Fossil Inc. siliconinvestor.com Adele Weisman and Ed Vroom of New York-based Roanoke Asset Management provides the following stock ideas. Below is the write-up. California Amplifier (CAMP 16 7/8) is a leading supplier of MMDS (Multipoint Multichannel Distribution System, also known as wireless cable) communications equipment. Adele Weisman of New York-based Roanoke Asset Management explains that the MMDS market will be "huge going forward." Sprint and MCI WorldCom spent $1.9 billion on licenses for the rights to use MMDS communications last spring. Those two companies will use MMDS to provide local and Internet access. "This indicates how serious Sprint and MCI are about MMDS technology and CAMP is well positioned to benefit from it." Adele notes that CAMP's revenues from the sale of MMDS equipment will begin to ramp up in 2000. CAMP is also a leading supplier of equipment receivers in the satellite area. They sell equipment to the two largest satellite providers, EchoStar and DirectTV. "The satellite market is giving the cable companies a run for their money," says Weisman. "We expect the satellite industry to begin to deliver local programming and that will be a driver going forward. In addition to the significant roll out of domestic satellite services, there is a huge international opportunity. CAMP is a small business that plays in two very important telecommunications markets." She figures the company will grow revenues at an annual rate of 40 percent over the next three to five years, with its shares "easily trading" in the low 20s within the next 12 months. Ed Vroom of Roanoke is high on Fossil Inc. (FOSL 28). The company sells moderately priced, high-quality watches, leather goods and sunglasses under its own brand and under license from well-known brands such as Georgio Armani and Donna Karan. Ed particularly likes the shares of Fossil because it trades less than 15 times next year's earnings, while growing at a 30 percent-plus rate. "The PE ratio is about half of their growth rate," he says. "Growth has been steady, incremental and they are currently in the middle of extending their existing lines and bringing out the Donna Karan products." He adds that many companies that compete with Fossil are losing market share to them. Ed estimates Fossil will earn $1.47 this year and $1.80 in 2000, with its shares hitting the low 40s within the next 12 months. There is a thread that discusses CAMP on SI. Subject 2628 ------------------------------------------------------------------ 3. Zales Corp. siliconinvestor.com Chris Beck of Delaware Management delinvest.com, provides the following stock idea on Zales Corp. (ZLC 37 7/8). Below is the write-up. "Diamonds are forever," that's what they say. Speaking of diamonds, they are "pretty" much a requirement when getting married. Cubic zirconia doesn't carry the same luster as a real diamond. Just a little advice to you guys: Never buy imitation diamonds. If your loved one ever found out it was a fake, you would be in the dog house, literally! Zales Corp. is the largest retailer of fine jewelry in the U.S. Zales primarily sells its merchandise in malls, in stores such as: Zales Jewelers, Gordon's Jewelers and Bailey Banks & Biddle Fine Jewelers. On Sept. 1 of this year, Zales entered into an ecommerce agreement with America Online as a preferred vendor to sell jewelry online. Chris Beck of Delaware Management favors Zales because it has many attractive characteristics. Within the last few months, Zales purchased Peoples Jewelers, which is Canada's largest jewelry chain. Chris adds that Zales is increasing the number of its stores through internal growth at a rate of 5-6 percent annually. "That rate of growth has been consistent... Zales accounting is clean... Management knows exactly what they are doing and have a superb strategy," he says. Zales just completed a $50-million stock repurchase and authorized another $50-million stock repurchase. Beck mentions that historically, Zales has always delivered what it said it would. "Management is loaded with options and has a great incentive to increase the value of their stock." He figures the company will earn $2.50 in calendar 1999 and $3 in 2000, with Zales stock hitting the low 50s within the next six months as the earnings picture remains clear. There is a thread that discusses ZLC on SI. Subject 30588 ---------------------------------------------------------------- 4. CenterSpan siliconinvestor.com Bart Blout of Sawtooth Capital Management provides the following stock idea on CenterSpan (CSCC 16 1/4). Below is the write-up. In the beginning, email changed the way we sent mail. Then came instant messaging, which changed the way Internet users communicated real-time. Next came WeCanTalkFree. Wait a second, so you have never heard of WeCanTalkFree, you say? Let's back up for a second. WeCanTalkFree is an implementation of technologies developed by Intel Architecture Labs, a division of Intel, and then licensed to CenterSpan Communications to refine the product development. The product is focused on small-group interactions and combines the functionality of buddylists with two new features: Multi-Point Audio (MPA) and Launch & Connect (L&C). Both use a PC-based, multiuser real-time screen to screen software technologies. MPA software allows two or more users to easily communicate in a group through voice, just like a telephone, while not accumulating a penny in long-distance charges. Also, Web sites can be viewed simultaneously by two or more users. Launch & Connect allows the ability, if the user permits it, for others to peer into a user's computer to find out what software applications are on it. Bart Blout of Sawtooth Capital Management explains that Launch & Connect has the ability to revolutionize interactivity between computer users as well as for ecommerce. Interactive video-game players will be able to easily locate and find other users of the same video game and play against each other. "Sales people will be able to easily determine if a user has a certain software application on their computer. If a Web user does not have a certain application, they could be offered a three-day trial of the software... The uses are literally limitless!" He adds that other software on the market does similar things but WeCanTalkFree will be the first application that makes Internet gaming (and other online collaboration and sharing) easy enough for the most novice users. One direct benefit of using WeCanTalkFree is that its software allows users to interact directly from PC to PC. Bart notes that PC to PC is important because Internet users that interact using America Online must do so through a server. Microsoft's software, in a widely publicized case, was prevented from going through AOL's servers because (among other issues) AOL was concerned about the extra resources the Microsoft application would consume. PC-to-PC connections reduce this resource constraint on CenterSpan servers. CenterSpan's stock has been nothing short of a rocket ship, trading at a low of 2ó in October of 1998, hitting a high of $26 last summer and now trading in the $15 range. CenterSpan has a float of about 2.5 million shares. Out of that float, as of Oct. 15, its short interest was 756,000 shares. Blout explains that many short players thought CenterSpan was shorting a peripheral company, which CenterSpan sold off at the end of September. Since CenterSpan's software was originally derived from Intel, he contends, "In shorting CenterSpan, you are shorting Intel... It is probably not a good bet. The people betting against CenterSpan will only have to wait a few months (when Launch & Connect is released) in order to see how wrong they are." Bart believes the shares of CenterSpan offer "tremendous upside." There is a thread that discusses CSCC on SI. Subject 9531 ------------------------------------------------------------------ 5. Interesting Articles on the Internet siliconinvestor.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 Internet companies may have a splendid edge over their earthbound competitors, but investors are realizing that they have expenses just the same. washingtonpost.com Digital Entertainment Network revealed the top four execs at the company paid themselves a combined $3.7 million a year, not including bonuses, warrants, stock options and advances. The 146-employee company - which makes TV-style shows for its own website - has lost $27 million since its inception and has not pulled in a single dollar of revenue. nypostonline.com The Internet economy is growing like a weed. A University of Texas study commissioned by Cisco Systems Inc. found that the Internet-related revenue of 3,400 companies grew to $108 billion in the first quarter of 1999, up 68 percent from $64 billion in the first quarter of 1998. mercurycenter.com It's getting tough to be a member of the Internet elite, now that 40 percent of Americans are on line. Snobs like me find it more difficult to stand apart from the common herd. Almost every time I learn of some flashy Internet service, it turns out many of you have gotten there ahead of me. globe.com For every entrepreneur who becomes an Internet millionaire, there are untold numbers who are struggling to eke out a living. Nevertheless, there is money to be made from online sales, provided you go about it correctly, market your products competently and, by the way, have products or services that people actually want to buy. latimes.com INTERESTING PROGRAMS ON THE INTERNET Alan Greenspan, Chairman of the Federal Reserve Board, recently discussed the role of technology in the economy and how our forefathers gave us a system that propelled the U.S. economy to the greatest prosperity the world has ever experienced. theaudioinvestor.com BioSource International, a company engaged in the development, manufacture, marketing and distribution of more than 3,000 products used in biomedical research, announced record sales for the latest quarter of $7.5 million, compared to $5.7 million reported for the same period in 1998. The Company reported net income of $.12 per share, versus a net loss of $.37 per share for the same quarter last year. theaudioinvestor.com SEMX Corporation, provider of specialty materials and services to the microelectronic and semiconductor industries, reported Net Income of $1,166,000 and Earnings per Share of $.19 for the three month period ended September 30, 1999. This compares to a Net loss of $ (600,000) and Loss per Share of $(.10) for the three month period ended September 30, 1998. theaudioinvestor.com Wasatch Fund managers and advisors are seeing values unlike they have ever seen before in the small and microcap sector - and are buying companies at a discout that normally demand a premium. theaudioinvestor.com Marcus Eder, technology analsyst, discusses the telecom sector and Digital Lightwave (DIGL) and Precision Optics (POCI). theaudioinvestor.com SEMICONDUCTORS After a dismal beginning, 1999 turned out to be a boom year for the semiconductor industry, the start of what an industry trade group forecasts as a four-year up cycle that will see worldwide chip sales increase 63 percent by the end of 2002. mercurycenter.com The tide has turned, and the global semiconductor industry is completing its first year of recovery. At the U.S. industry's annual dinner this Wednesday, the SIA is expected to forecast 1999 global industry sales approaching $150 billion, the first double-digit increase since 1995. Prospects for 2000 and 2001 are even better. mercurycenter.com The chip industry recovery has yet to extend to the front of the semiconductor food chain. Semiconductor Equipment and Materials International (SEMI) has officially downgraded its forecast for 1999 to 5 percent growth in equipment sales, a revision from the 9 percent increase forecast in August at Semicon West. techweb.com MARKETS AND INVESTING The economy was on a tear. Americans, earning more than they ever had before, filled their homes with the latest gadgets and machines. People stopped socking away money in savings accounts, betting instead that they could multiply their gains in the stock market. If this sounds familiar, it's not surprising -- the same economic conditions apply today. But the year was 1929. mercurycenter.com Wall Street's most exclusive club, the Dow Jones industrial average, yesterday let in folks from the wrong side of town, the Nasdaq Stock Market. washingtonpost.com As an investment adviser who claims to barely pay attention to the Dow these days, Smith was basically underwhelmed by the news that the Dow will make the changes on Monday. post-gazette.com Thw uneven playing field between individual and institutional investors is leveling out. The Internet, which distributes widespread information about the market way beyond Wall Street and right to the heart of Main Street, is one of the best tools that an individual investor can use. nypostonline.com Working with Morningstar Inc., the magazine looked at the stock and mutual fund picks made by Money, Kiplinger's Personal Finance, and Smart Money during 1994, 1996, and the first eight months of 1998. The results are a disaster. By the time a magazine figures out something is worth owning and puts it on the cover, the investment typically is about to cool down. Buying from the covers, therefore, leads to a portfolio of recognizable names with performance that may be surprisingly below average. globe.com ----------------------------------------------------------------------- 6. AMIDEX35 Fund siliconinvestor.com Joe Dancy, co-editor of the IFC and editor of The Lone Star Growth Investor members.aol.com, provides the following interview with Boaz Rahav of the AMIDEX35 Fund amidex.com. To conserve bandwidth please click the link below to view the article. siliconinvestor.com ----------------------------------------------------------------------- 7. siliconinvestor.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 or the company they represent 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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