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The Internet Financial Connection September 24, 1998 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 :) -------------------------------------------------------------- This newsletter can be viewed at techstocks.com In This Issue: 1. Technology Outlook with Mike Tucker of Federated Investors 2. Exabyte 3. Cisco Systems 4. Small Cap Stock Ideas With Value 5. Interesting Articles On The Internet by Joe Dancy 6. Highlights on SI: Melita International 7. Highlights on SI: by Tom Taulli 8. Disclaimer ---------------------------------------------------------- 1. techstocks.com Mike Tucker of Federated Investors, provides the following technology outlook in an interview with Mark Johnson, Editor of the Internet Financial Connection. Below is the write up. Mike Tucker, a technology and mid-cap growth analyst with Federated Investors, favors the large cap stocks because of the uncertainty in the overall market. He thinks they will outperform the overall market because investors will consider them a safe haven in turbulent times, such as the one we are in right now. One of his favorite areas that he has been focusing on is the communications equipment area. As the telecommunications race expands, domestically and internationally, company's that supply the hardware for the infrastructure will be direct beneficiaries. "Internationally economies continue to spend money in upgrading and implementing communication networks... Growth should continue to be strong," says Mike. Some stocks he favors in the communications equipment area Tellabs (TLAB 47 1/4). Their stock is down from a high of $93, because of a failed merger with Ciena. He thinks fair value of the stock is in the $75 area. Another one of his favorites is data network equipment maker Cisco (CSCO 66 1/4). He thinks their shares can hit $75 over the next year. Another favorite is Ascend Communications (ASND 48 3/8). They are a maker of wide area networking solutions for telecommunications carriers. Another area he likes is the software sector. As we approach the year 2000, many companies are rushing to embrace the Y2K problem. It has been feared on Wall Street that software sales will show slower growth in 1998, as more and more businesses focus on the Y2K problem. Mike sees businesses putting more of their IT (Information Technology) budget emphasis on resolving the Y2K issue, but also feels that many "software stocks will hold their ground." His favorite software company is the 900 pound gorilla Microsoft (MSFT 113 5/8). Another company that is high on his list is Peoplesoft (PSFT 33 1/2). They market and distribute enterprise client/server application software products that help manage segments of medium to large businesses. He thinks their shares can hit $60 per share. Citrix Systems (CTXS 72 1/2), is a supplier of thin client/server application server products. "They are getting support for their new products and are also signing up new clients," says Mike. He estimates their shares can hit $85 per share. Siebel Systems (SEBL 26 3/8) develops enterprise-class sales and marketing information software systems. He thinks their shares can reach $35 within the next 12 months. In the computer manufacturing area, he likes Dell (DELL 64 3/8) and Apple Computer (AAPL 38 3/8). Despite all the fears and worries about a slowdown in Internet traffic, Mike notes that Internet traffic is coming off of the slowest time of the year but "Growth will remain strong." He favors Internet leaders such as America Online (AOL 115 1/4) and Yahoo (YHOO 117 7/8). He thinks that advertising on the Internet will "take-off" sometime during the next year. DoubleClick (DCLK 21 1/4), which places ad banners on the Internet, has a large portfolio of web sites where their banners appear. "They should be a main beneficiary and do very well from Internet advertising," says Mike, "They are a leader in that area." Inktomi (INKT 80) is an Internet software company that offers a highly rated search engine. Yahoo! uses their search engine and Inktomi receives a percentage of the advertising revenues from the searches that are performed on a web site where they operate. Mike says, "This is an ongoing revenue stream that is highly tied to the increase in advertising on the Internet." Mike is very cautious in the semiconductor capital equipment area. He reiterates the consensus among many top forecasters and says that there is still a lot of capacity in the industry. Untill that is cleared up, very few of those stocks will appreciate. "Right now, overall end demand is not that strong," he is still skeptical in that industry. ----------------------------------------------------------------- 2. techstocks.com Dennis Bryan of the First Pacific Advisors, provides the following stock idea on Exabyte (EXBT 5 5/8). Below is the write up. As the market favors larger capitalization stocks, such as Microsoft and Dell, smaller cap stocks have been lagging the larger cap stocks and it has been one of the worst performing times for that area. One small company that Dennis Bryan of First Pacific Advisors has been snapping up shares of is Exabyte and has accumulated a 14% stake in the company. So, what makes this company special? From a valuation perspective, Dennis finds their company compelling. They have about $300 million in revenues, $2.50 in cash, no debt, are not losing money, are cash flow positive and the market is valuing the total company at $120 million. Exabyte primarily makes a tape-drive that backs-up and archives information on computers and servers. They fell behind the competition about 4 years ago. Their main competitor is Quantum. The main reason why Exabyte fell behind is because most of their products were manufactured in Japan. It was then decided they wanted to manufacture the products themselves. This decision had caused delays in production and a loss on the focus in their products. Exabyte is working on a new generation tape-drive called Mamouth II and will be available during the first half of 1999. This new product will be able to store 60 to 70 GB (gigabytes) and will have a data transfer rate of 12 MB (megabytes) per second. Quantum is also working on a new tape drive that will store 100 GB, but will only have a data transfer rate of 10 MB which is about 20% slower than Exabyte's. Dennis notes that Quantum will be substantially late in delivering their product. "Six months ago, Quantum said that their product would be ready during the first half of 99. A few weeks ago, they announced that their product would be ready during the second half of 99," he says "They will be substantially late with their product and most likely not be ready until mid 2000." One issue Dennis raises is that Quantum's new product will not be backward compatible with their previous model. "Quantum is saying that it will be backward compatible. I have talked with 5 of their biggest customers and all of them are very skeptical about their product being backward compatible," he says. Dennis figures that Exabyte could earn $1.50 to $2.00 per share sometime during the next few years. If that happens, he thinks their stock could hit $20 to $30 per share. There is a thread that discusses EXBT on SI. Subject 1848 ------------------------------------------------------------------ 3. techstocks.com Tom Ricketts of the Sands Capital Management, provides the following stock idea on Cisco Systems (CSCO 66 1/4). Below is the write up. Tom Ricketts, CFA of Sands Capital Management, an avid Silicon Investor user, states that rather than focusing on the short-term or getting too quantitative, the firm's research team emphasizes key qualitative factors that help to locate companies that lead and dominate attractive growth industries. This strategy has done well for them during the past 10 years (ending 12/97), accomplishing a 21% annual return, compared to the S&P 500 return of 18%. So how do they select stocks? They focus on a specific company that is a leader in a sector and then hold it for long-term appreciation. "The single most important determinant of stock price appreciation is long-term growth in the earnings of a company... So, the question is, what creates this long-term growth?" says Tom. He notes that there are 6 criteria that a company must achieve in order to lead an industry: 1. Create growth drivers: new products, services and markets 2. Anticipate important industry trends 3. Gain market share 4. Construct competitive barriers 5. Build financial strength 6. Display superior management ability Frank Sands, head of Sands' research, calls the companies that exhibit those high quality growth characteristics "Wealth Creators". One example of a Wealth Creator, which is also one of their largest holdings is Cisco Systems (CSCO ). They are the dominant data network equipment industry leader which entails LAN, WAN and the Internet. They have leading positions in all of the segments in the industry. Tom points out that there is only one company that can offer an end-to-end solution to a network from one computer to another and that is Cisco. One big trend is the convergence of voice, data and video over one network. Phone companies typically had separate networks for voice and data. Going forward, data networks will be able to carry voice as well as data. There is a debate about how Cisco will go up against the telecom equipment market and Lucent Technologies in particular. Tom modestly states that networks are moving away from circuit-switched networks to packet-switched networks. Cisco is dominant in packet switching equipment. "This means that the market is moving towards Cisco and not Lucent." This means that Lucent must create entirely new products to go up against Ciscos' products that have been in development for years. Tom admits that Lucent is a strong company but believes that they will only be able to grow their topline at about one-half the rate of Cisco's topline. Another interesting point he makes is that both companies trade at about the same PE ratio going forward. Tom estimates Cisco can maintain a longer term growth rate of 25% to 30% per year. There is a thread that discusses CSCO on SI. Subject 414 --------------------------------------------------------------------- 4. techstocks.com Fred Astman and Scott Hood of First Wilshire Securities firstwilshire.com , provides the following stock ideas. Their firm focuses on small cap stocks. Below is the write up. Value investors Fred Astman and Scott Hood of First Wilshire Securities, find a lot of value in the stocks they invest in. A majority of the stocks they are investing in are estimated to grow earnings in excess of 30%, when comparing 1998 earnings with 1999's estimates. One of their favorites is Interstate National Dealers (ISTN 6 7/8). They service warranties for new and used motor vehicle, recreational vehicles, watercraft, motorcycles and other vehicles. They have over $7 per share in cash and should earn $0.63 for fiscal year ending this October. They are estimated to earn $0.77 the following year. "This is a company that is growing in excess of 20% and their PE ratio going forward is less than 10," says Fred. Another favorite of theirs is Meridian Medical Technologies (MTEC 7 7/8). They are a global leader and maker of auto injectors, where you inject yourself with a needle as needed for conditions such as allergic reactions or antidotes for chemical warfare. Recent increases in terrorism is presenting new opportunities, as they are the exclusive manufacturer of nerve gas antidote injectors. Fred and Scott both estimate that Meridian can maintain an annualized growth rate of 25% during the next 5 years. They are expected to earn $0.90+ in 1999 which will give them a forward PE ratio of about 9. Another top holding is Children's Comprehensive Services (KIDS 10 1/4). They are a juvenile education provider for young people who are too disruptive to attend normal public schools. They also provide residential treatment for psychotic and severely emotionally disturbed children and locked detention facilities for violent youth. They reported earnings of $0.73 for the year and are forecast to earn $0.90 in 1999. They are making acquisitions and could grow at annual rate of 20% over the next few years. One speculative company that they own but "offers a lot of value" is First South Africa Corp. (FSACF 1 3/16). More information about the company can be found at firstsouthafrica.com . They are a holding company and only trades here in the U.S. They own 70% of a company that does trade in South Africa that is worth $35 million (in U.S. currency). The entire market value of First South is less than $9 million. It trades at a PE of about 2 and has gone down this year because there is little interest in emerging markets by domestic investors. Other factors such as the South African currency has come down against the American dollar by about 30%, while at the same time the South African stock market has come down 40% on fears of recession. ----------------------------------------------------------------- 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 INTERNET AND INTERNET COMMERCE The buying habits of Internet users mirror those of the general consumer population scmp.com The bloom is off Internet stocks mercurycenter.com Entrepreneurs increase, use the Internet to create thriving businesses herald.com SEMICONDUCTOR & ELECTRONICS Chip equipment book-to-bill ratio dips in August sfgate.com World market leaves room for Dell to keep growing mercurycenter.com Chips recovering, but equipment still slumps techweb.com ECONOMIC U.S. economy is set to 'fall flat on its face,' but picture is brighter for Canada canoe.com Survey: Gates ranks only No. 5 among richest Americans of all time globe.com The 100 wealthiest individuals in the U.S. high tech industry are worth an astounding US $150 billion - and most of that wealth has been created in just the past six years, according to Forbes magazine's second annual ranking of the field. 'It may be the single greatest period of wealth creation in American history' members.aol.com The global economic crisis is making the leader of the world's largest automaker increasingly nervous - GM asks the Fed to cut short-term interest rates detnews.com MARKETS & INVESTING August 14.6% drop in the stocks in the Standard & Poor's 500 index was the largest monthly decline since October 1987. It also ranked as the eighth-largest monthly decline since 1926, the year records were started on the index. The August swoon of 19.5% by the Russell 2000 - which is populated by small-company stocks - was the second-largest monthly decline in the history of that index. dallasnews.com | ||||||||||||
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