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The Internet Financial Connection September 17, 1998
Presented by Mark Johnson, Editor of the IFC
It appears exclusively on Silicon Investor
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In This Issue:
1. Value Investing in Tech Stocks with The Prudent Speculator
2. Nick Whitridge of the Babson Value Fund
4. Zebra Technologies
5. Interesting Articles On The Internet by Joe Dancy
6. Highlights on SI: Tim Luke's Position Trading Forum
7. Highlights on SI: by Tom Taulli
8. Does a Bear Short in the Woods? by David Z
9. Semiconductor Industry Outlook: Explosive Rebound?
10. Micro-Caps Suffer One of the "Worst
Declines In History" - Are They Poised to Recover
Al Frank and John Buckingham of The Prudent Speculator
provide the following interview. An annual subscription
is $175 for 12 issues and you may contact them at
800-258-7786. They provide the following interview
with Mark Johnson, Editor of the Internet Financial
Connection. Below is the write up.
Al Frank and John Buckingham of The Prudent Speculator
(TPS), run and publish a top performing newsletter.
According to Hulbert Financial Digest, which ranks
the performance of financial newsletters, TPS was
ranked number 1 for having a 5 year performance
returning 34% annually. Hulbert also mentions that
their newsletter had an annualized return of 20.3%
during their 18 years of operation and is ranked #1
in that time frame.
"We operate on the principle of buying undervalued
stocks and putting them in a widely diversified
portfolio and holding them until they reach fair
value, using fundamental analysis such as book value
and price to sales ratio," says Al. He will then add
a stock to his portfolio that he thinks will appreciate
in value and usually holds on to it for an average of
7 years. The company that he selects can be any size
and in any industry, just as long as it is undervalued
by using fundamental analysis.
Both Al and John feel that there are many stocks in
the technology sector that offer a lot of value and
are very cheap. They point out that the stock prices
of many technology stocks have (generally speaking)
not been this cheap on a valuation basis since 1990.
Al notes that technology stocks are very cyclical in
nature. An example of this is computer chip
manufacturers. Chips become a commodity and too many
fabs are built and over produce. The price of these
chips go down below the price of production and some
chip producing companies go out of business. Inventory
is reduced, then a few years later, there is a new
generation of chips and a shortage of chips once again.
John points out that it is a phenomenal time to be buying
the lessor known technology names. He likes areas such as
the disk drive makers, semiconductor capital equipment
companies, semiconductor stocks and integrated circuits
companies. "All of these are selling at very low valuations
compared to where they have been." Business has dried up
because of the slowdown in orders caused by the Asian
turmoil. He thinks the demand for PC's will be strong
In the semiconductor area, John stresses that the area
is very cyclical and notes that we are in a technology
driven society and people will not stop buying computers
tomorrow. "Semiconductor growth will return and if you can
buy semiconductor stocks at very low fundamental
valuations, it is a positive thing to do."
John specifically likes the disk drive sector because that
area offers a lot of value. He notes that the disk drive
is not going away and every PC that the major computer
manufacturers make has a disk drive in it. Some of the
companies he likes in that area are; Seagate Technology
(SEG 23 3/4), Quantum Corporation (QNTM 15), Western
Digital (WDC 9 7/8) and disk drive component maker
Read-Rite (RDRT 7). In the capital equipment area he
favors; Applied Materials (AMAT 24), Kulicke & Soffa
(KLIC 14) and Lam Research (LRCX 10 1/2) For the
semiconductor companies John likes National Semiconductor
(NSM 8 3/4).
In the integrated circuit area John is high on Trident
Microsystems (TRID 2 7/8). They are a graphics chip
maker with no long term debt, $3 in cash and have a
book value of $8 per share. Another one he likes is
ESS Technology (ESST 2 1/8). They make highly integrated
mixed signal semiconductors for PC's. They have a book
value of $3.5 and no long term debt.
John mentions that cyclical industries will eventually
come back. "Prices go from extreme highs to extreme lows,
we think that as long as the demand remains strong
(PC demand), then you can buy stocks at very attractive
prices, relative to where they usually trade... We think
you can do very well with a long term orientation."
Some other stocks he likes in general are ZOOM
Telephonics (ZOOM 3 3/8). They make 56k modems, have no
debt, have about $2 per share in cash and has a book
value of $5 per share. Rouge Industries (ROU 7 7/8)
is a steel producer that has no long term debt and
has a book value of about $20 per share. Gymboree
(GYMB 7 5/8) is a specialty retailer of high quality
apparel for children. They are expected to earn around
$1.15 next year and trades at 1.2 times book value.
John points out that buying stock in companies that are
trading at low price to sales ratios, low price to book
values and with low PE ratios, historically over the last
75 years have exceeded the returns of the overall market.
"We are very excited about the longer term prospects in
the companies that we are investing in today".
Nick Whitridge of the Babson Value Fund
jbfunds.com, provides the following stock
ideas in an interview with Mark Johnson, Editor of the
Internet Financial Connection. Below is the write up.
"It is a difficult time for value oriented investors
because the market is favoring growth stocks," says
Nick Whitridge, who manages $1.4 billion in the Babson
Value Fund. When the market declined in August, many
stock values were created. One stock that did not
perform in his fund last year but was a big winner in
his fund this year was Apple Computer (AAPL 37 3/8).
When this stock was down and out in 1997, this savvy
pro stuck by their stock, was accumulating shares and
averaged down his position in their company. His fund
currently holds 875,000 of Apple and he is still
bullish on their company even though it has run up in
price. "It is not a cheap stock but we think there is
more upside because of the success of iMac and
PowerBook G3," says Nick, "The demand for iMac is higher
than most people expected... They have reported 3
positive quarters in a row and the outlook for the next
quarter is very favorable."
Another stock that he likes but has been beaten down
in his fund is US Steel Group (X 20 3/4). Asia steel
producers have been "dumping" steel but Nick believes
that has peaked and should slow down. Other factors
such as the General Motors strike have reduced the
demand for steel and steel products. Nick notes that
most people consider US Steel "a dinosaur" but assures
that there will be demand for steel because it will be
needed for building structures and automotive parts.
He does not see high impact plastics immediately
replacing steel parts in automobiles.
Even though earnings estimates for US Steel have been
cut recently, Nick figures they will earn $3.50 in
1999 while having an 8% growth rate going forward. US
Steel also sports a 4.7% dividend yield, which is
better than most money market accounts. He feels that
earnings are not being valued like they should be and
that patient investors that own their stock should be
In the banking sector, Nick likes Chase Manhattan
(CMB 48 1/8). Most banking stocks have been depressed
because of the fear of an interest rate cut (which can
squeeze profit margins) and exposure to foreign loans.
Chase did report some foreign exposure but nothing that
is significantly material. Chase is trading at about
12 times trailing earnings and yields around 3%.
Another beaten down stock that Nick likes in the
healthcare sector is United HealthCare (UNH 38). They
are a provider of managed care services, such as health
maintenance organizations (HMO's) and preferred
provider organizations (PPO's). Nick notes that they
are restructuring their Medicare business, which has
not been very profitable and and a recent writeoff has
caused a significant drop in their stock. He favors
their longer term potential with their stock trading at
about 13 times earnings which could grow at
a 15-18% rate.
Jeff Cornell of the Country Wide Equity Fund
(800-438-9060) provides the following stock idea
on Pepsi (PEP 31). Below is the write up.
Pepsi has declined from a high of $44, which was
set back in July of this year to a new 52 week low
of $27 a share recently. Jeff Cornell of the Country
Wide Equity Fund notes that there has been specific
concerns raised by investors and that has helped push
down their stock besides market fundamentals. One of
those concerns was Pepsi's purchase of Tropicana on
August 25, for $3.3 billion. Some investors believe
that amount was too much pay for the juice maker, but
Jeff thinks otherwise. "This will allow them to put
more of their products in distribution internationally...
Tropicana has a great international distribution system
that Pepsi can leverage off of," says Jeff.
Another concern is that there worries about a slow down
in Pepsi's snack food division Frito-Lay, which
comprises 55% of their revenues. Snack food sales are
released on a monthly basis and during the months July
and August. Sales were lower than expectations because
of slowdowns in production of the new Olestra based
WOW! chip product line. Jeff adds, "The demand was
there but supply was not because they were ramping up
on new products." A national ad campaign was kicked off
on Monday to reinforce the response of consumers who
have purchased more than 150 million bags of WOW! chips.
This aggressive five-week marketing campaign is expected
to reach roughly 100 million people.
The bottling facilities that Pepsi owns, Jeff notes are
very capital intensive, expensive and take up a lot of
cash flow. Competitor Coke, has spun-off their bottling
facility and it is a separate company. Pepsi has indicated
they may be willing to sell or spin off their bottling
operations. That would allow them to use the additional
capital to further develop their products and distribution
systems. As the foreign markets become more unstable,
stocks that have more exposure in foreign markets have
been more volatile. Pepsi derives about 66% of their
revenues domestically, where as Coke only generates 35%
of their revenues in the U.S.
Pepsi is estimated to earn $1.31 this year and $1.51 in
1999. Jeff has been accumulating shares of their stock
during the current weakness in the stock. He thinks their
shares could easily hit $40 per share within the next year.
There is a thread that discusses PEP on SI.
Ingrid Hendershot of Hendershot Investments provides
the following stock idea. An annual subscription is
$45 for 4 issues. You may contact them by phone at
(703)-361-6130. Zebra Technologies (ZBRA 28 3/8) is
a recent selection from her newsletter. Below is
her write up.
Zebra Technologies provides bar code solutions,
principally to manufacturing and service entities
worldwide, for use in automatic identification and data
collection systems. The company designs, manufactures,
sells and supports a broad line of computerized label
printing systems, related specialty supplies and PC-based
bar code labels. Applications for the company's systems
include inventory control, automated warehousing,
just-in-time manufacturing, employee time and attendance
records, file management systems, hospital information
systems, shop floor control, library systems, prescription
labeling and scientific experimentation.
Since the company went public in 1991, Zebra Technologies
has reported steady, profitable growth. Over the last five
years, both sales and net income have raced forward at
zippy compound annual rates of 22%.
Zebra anticipates that its future growth will be enhanced
by two continuing trends: bar code label standardization
programs and focus worldwide on improving quality and
productivity. Over the last three years, about 45% of
sales came from international markets, primarily from the
United Kingdom. Sales in the Asia-Pacific region are less
than 10% of total revenues. Management believes
international sales have the potential to grow faster
than domestic sales due to lower penetration of bar code
systems outside the United States.
In mid-July, Zebra agreed to merge with Eltron, a
manufacturer of bar code label and plastic card printers,
secure card printing systems, ribbons and self-adhesive
labels. The no-dilutive transaction is structured as a
pooling-of-interests tax-free merger and is scheduled to
close by early October. On a pro-forma basis, the combined
company would have generated sales in excess of $313 million
in the 12 months ended March 31, 1998
Zebra and Eltron management cited several important strategic
benefits resulting from the merger, including the creation of
the broadest line of bar code printers in the world, expanded
distribution of both companies' product offerings, and
opportunities to reduce costs through greater economies of
scale. With the largest product development team in the world
dedicated to bar code printer products, Zebra expect to more
rapidly develop new printer products to serve the expanding
needs of its customers.
As of June 30, 1998, the combined companies boasted more than
$145 million inn cash and virtually no long-term debt. This
excellent financial position provides management with a
strong competitive advantage.
Other substantial competitive advantages include Zebra's
dominant market share, broad and diverse channel structure,
technically superior products and the strongest brand name
in the industry. At the end of last year, Zebra estimated
that it had over 290,000 bar code printing systems installed
at approximately 30,000 user sites around the world.
While Zebra many not be the king of the jungle, the company's
profitability measures provide investors with plenty to roar
about. Since 1990, high profit margins have translated into
consistently superb returns on equity of greater than 20%.
Long-term investors should consider taking a ride on Zebra
given the company's steady, profitable growth and outstanding
financial condition. Management owns a substantial position
in the company.
(There is a thread that discusses ZBRA on SI.
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
E-commerce threat oversold: retailers
In Paris, making a case for a pay-as-you-go internet
At least three Internet broker systems reported
glitches that caused orders to back up in a falling
Worldwide sales of semiconductors fell 17 percent
in July according to the Semiconductor Industry
The decision by three of Japan's "Big Five"
chipmakers to close manufacturing facilities in
the U.S. and Europe and to lay off employees is
widely viewed as a response to the triple threats
of overcapacity, unfavorable currency exchange rates
and plummeting memory prices.
Rubin, Greenspan working to steady jittery world
Greenspan steps into leadership vacuum
Deflationary forces loom on economy
Threat of deflation is very real
Global deflation hits home
Take a global currency crisis, toss in the possible
impeachment of the U.S. president and the prospect
of a worldwide recession no longer seems a stretch.
Rumors flew that the Federal Reserve would calm world
financial markets by cutting short-term interest rates
half a percentage point before the day was out, or next
week, or at least sometime soon.
MARKETS & INVESTING
Micro-caps suffer one of the "worst declines in history"
but are poised to recover
Can small-caps be nearing a turnaround?
When the going gets tough, investors head to safe havens
Flight of foreign investors is driving force in stock
If Wall Street could talk, its advice to Congress on
handling Kenneth Starr's case for impeachment of
President Clinton would be succinct: Whatever you do,
do it quickly.
The quicker the political problems are over, the better
for Wall Street
Despite market's gloom, this may be good time to
ASIA, JAPAN & RUSSIA
For Japan, the prospect of a recession in the United
States prompts wide-eyed horror, but it also carries
a whiff of sweet redemption.
The Mexican economy may have avoided the Asian flu,
but it sure has caught the Russian cold.
Japan's central bank today said the battered economy
was deteriorating and recovery was not in sight, as a
top Finance Ministry official warned that the nation
was teetering on the edge of a deflationary spiral
Demand in Latin America for high-tech products has
fueled a boom in South Florida. but now slows
The spreading global economic crisis seized its latest
victim - Latin America
Japanese bank experts warned that the nation's
financial crisis is deepening, despite government
promises to revive the economy and international
pleas for bolder action
America isn't looking very safe to foreign investors.
The sudden meltdown of Russia's currency and the
volatile swings of the U.S. stock markets have
triggered a crash of confidence in the West's
prescription for Asia's economic crisis.
Tim Luke is the creator and an active participant
at the Tim Luke's Position Trading Forum thread
on SI. Tim provides the following commentary about
what goes on there and what his thread is all about.
Below is his write up.
I started my thread "Tim Luke's Position Trading Forum"
to bring together other SI members who trade in this
fashion. The object of this thread is to post what stocks
people feel are the best position plays. The time span on
holding a position play is anywhere from 2 days to 2 weeks
with a return of 20 to 60 %. I'm also trying to get other
investor's to post their thoughts on the short term market
( 3 months ), being bearish or bullish. I know their are
many savvy investor's lurking on SI and I wanted to pull
these people in for my benefit as well as for others to
get a different prospective on stocks and the market
I spend countless hours searching for news and stocks
that might make for a quick short term gain. Many of these
stocks I will trade many times through out the week buying
and selling on every dip. I feel that for myself being a
day/position trader is the safest way to play this market.
As you well know that many of the long term investor'
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