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The Internet Financial Connection September 24, 1998
Presented by Mark Johnson, Editor of the IFC
It appears exclusively on Silicon Investor
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In This Issue:
1. Technology Outlook with Mike Tucker of Federated Investors
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
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
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
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.
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
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
There is a thread that discusses EXBT on SI.
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
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
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.
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
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.
Joe Dancy of The Lone Star Growth Investor
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.
INTERNET AND INTERNET COMMERCE
The buying habits of Internet users mirror those
of the general consumer population
The bloom is off Internet stocks
Entrepreneurs increase, use the Internet to
create thriving businesses
SEMICONDUCTOR & ELECTRONICS
Chip equipment book-to-bill ratio dips in August
World market leaves room for Dell to keep growing
Chips recovering, but equipment still slumps
U.S. economy is set to 'fall flat on its face,'
but picture is brighter for Canada
Survey: Gates ranks only No. 5 among richest
Americans of all time
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'
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
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.
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