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The Internet Financial Connection, January 14, 1999
Presented by Mark Johnson, Editor of the IFC
It appears exclusively on Silicon Investor
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In This Issue:
1. Is The Internet Bubble Ready to Burst?
2. Network Associates
5. Interesting Articles On The Internet by Joe Dancy
6. Highlights on SI: by Tom Taulli
Is The Internet Bubble Ready to Burst?
Just when everything was looking fine and
dandy in the Internet sector, Morgan Stanley's
Internet ax, Mary Meeker (AKA "The Internet
Queen") comes along and says, "We would like
these stocks to sell off to release some
pressure from the system they have helped
create." Who is this lady to come in and take
some of the pressure out of the Internet
stocks? Yahoo! has gone from $240 last week
to $445 this week, Amazon from $115 to $163,
Excite from $43 to $77, Infoseek from $50 to
$100 and so on.
Now being serious, the Internet stocks are do
for some sort of correction. After reporting
earnings on Tuesday evening, Yahoo! opened at
$335 on Wednesday, previously closing at $402,
rose to $406 and then closed at $368 on the day.
Even daytraders trying to trade that stock
probably carry some sort of anti-ulcer
medication in their pocket.
About 7 weeks ago, the total market valuations
of the top 20 Internet companies were worth
under $100 billion. Now, the combined market
capitalization of America Online and Yahoo!
is alone worth $100 billion. If you assume
that the stock market has about $10 trillion
of value, $100 billion (7 weeks ago) does not
really stack up to much, considering the
Internet will revolutionize many things;
advertising, retailing (e-tail), communications,
you name it... etc. The same 20 largest Internet
stocks now have a combined market capitalization
of around $170 billion.
With the current run-up in the Internet stocks,
many small investors are the reason for pushing
them up so high. They are simply looking for some
exposure to the Internet. Some are blindly
throwing money into stocks they know little or
nothing about. A combination of things could
happen. Even if there is a severe correction for
the Internet stocks, I feel that it will be short
lived and could be quick and painful. Average
values could be cut in the range of 30% to 50%
One of the reasons why they will rebound after a
correction, and I do mean (rebound), is because
the Internet is one of the few areas of the market
that is guaranteed to grow excessively during the
next 5 to 10 years. People like to buy companies
that are in growing industries. This Internet
frenzy still has legs. Small Investors as well as
mutual funds want a piece of the action.
Ron Insana of CNBC did a wonderful piece this week
about how the stock prices from prior manias in
the stock market are comparable to the current
Internet mania. He noted that many stocks such
as auto, radio, telephone and biotech stocks all
at some point in time, had very lofty valuations
and it took years for many stocks in those sectors
to actually get back to prior highs. In many ways,
I agree with him, but in other ways the Internet
will continue to change the way we work, shop,
communicate and we are still early in the game.
Before you get ready to go in and buy you favorite
Internet stock, just remember one thing. First,
don't make Internet stocks a significant part of
your portfolio just because it is the future.
Second, if you are looking to buy these Internet
stocks, don't chase them on the way up, wait for
them to come to you. Third, at some point they
will spill over like they are starting to do right
now. Wait until the group makes a severe correction,
such as decline as a whole in the area of 5% to 10%
each day for several days. This is a common pattern
for the Internet stocks. Fourth, buying leaders in
a group is usually the best strategy (historically).
For example, America Online (AOL 145 3/4) is a
leader. They are an ISP provider, profiting from
advertising and e-tail. Last I heard, they had
about 15 million paying subscribers. They are
actually receiving money from their users, unlike
many Internet portals. If they can't make more in
the field they are in, then no one can. They have
the economies of scale to profit where it is hard
for smaller ISP providers to make money. They are
making money selling other goods and services to
their users. Going forward, they will continue to
profit and their stock will continue to rise.
In the Internet portal area, Yahoo! (YHOO 368) is
a leader in the area in which they operate. In
addition to reporting record earnings, they
announced that they had 35 million registered
users in the recent quarter, up from 25 million
last quarter. They have made and are making inroads
to accumulate as many users as possible. Eventually,
they will be able to leverage their business to
their users buy offering e-tail and other services
to grow their revenue steam.
As noted above, buying a few leaders in the
Internet area, when a correction does happen, is
the best time to buy into that sector. The leaders
generally have the staying power to weather a
downfall and people tend to run to them in times of
trouble or uncertainty. They are the safest "bets"
in the Internet industry but, would only recommend
buying them during sharp corrections.
If you are looking for a service that offers the
best news on Internet stocks, Steve Harmon of the
Internet Stock Report offers a fantastic and
comprehensive report on Internet stocks and the
industry. His top 10 Internet stocks to watch were
up 310% in 1998 and he recently posted his top 10
stocks to watch in 1999. Click here to go there. He
also offers a free e-mail update. If you are
interested in the Internet industry, his newsletter
is a must.
Mark Johnson Editor IFC
Randall Williams-Gurian, Editor of Undervalued
Stock Ideas, usistocks.com provides
the following commentary. You may receive a
FREE trial copy of his publication and details
can be found at the above web site. His
recommendations generated an average annualized
return of 34%. An annual subscription to his
newsletter is $125. He provides the following
stock idea on Network Associates (NETA 54 5/8).
Below is his write up.
Network Associates (NETA) was formed in
December of 1997, by the merger of McAfee
Associates and Network General. McAfee paid
$920 million to acquire Network General,
completing the transaction using the pooling
of interest method of accounting. Meaning,
there is no goodwill to amortize as part of
the acquisition, but the newly formed company
must absorb all of the outstanding shares of
both companies. The newly created company offers
a full line of network products to its corporate
customers, particularly those running the
Windows NT operating system. NETAs' product
offerings include; anti-virus, security, network
management, and help desk software. These
products are offered as a complete suite known
as Net Tools. In addition, NETA offers consulting
services to its clients, which in 1997, accounted
for 17% of the company's revenues. Some of NETAs'
more significant competitors include; Computer
Associates, Remedy Corporation, IBM, Hewlett
Packard, and Checkpoint Software.
The network software industry is undergoing a
considerable amount of consolidation, with NETAs'
recent acquisitions. In August of 1998, NETA
acquired Dr. Solomon in exchange for about $700
million in stock. Dr. Solomon is the leading
anti-virus vendor in the United Kingdom and the
acquisition should enhance NETA's presence in
the region, as well as the rest of Europe. NETA
also agreed to purchase Cybermedia, a leading
software utility provider for about $130 million
NETA is benefiting from the explosive growth of
the NT operating system sold by Microsoft
Corporation. Microsoft is set to release version
5.0 of this product in late 1999. Microsoft NT
software is targeted for the small to medium
size business market, with aspirations of
acceptance as software reliable and capable
enough to run large computing jobs. Microsoft
is betting its future on the NT product. Bill
Gates' vision is to move all Microsoft customers
to the NT platform, including individuals running
Microsoft's Windows desktop operating software.
By the year 2000, Microsoft will only produce a
NT version of its operating software for running
computers. This is fortuitous for NETA, as the
company dominates the market for security,
anti-virsus network management, and help desk
software running on the NT platform.
NETA maintains the leading market share in two
of the areas of network management software.
The company's Sniffer product has an estimated
76% market share of the software needed to manage
and analyze high and midrange networks. NETA also
dominates the market of anti-virus software with
an estimated 60% market share. Both of these
markets are expected to do well, as more and more
companies move to expand their networks and more
and more information moves across
NETA trades at a reasonable multiple, especially
given the prognosis for demand for its products.
The stock currently trades in the mid 50s, or at
about 30 times fiscal 1998 estimated earnings of
$1.50. However, the stock trades at only 22 times
next earnings estimate of $2.20, versus an
expected 35% growth in revenues and earnings.
In its most recent quarterly report, NETA
reported earnings of 41 cents, a share excluding
special charges on a 33% revenue rise to $242.4
million. NETA's balance sheet is clean, with no
long-term debt and over $120 million in cash.
If you are looking to purchase a network software
company, with a dominant market position trading
at a conservative multiple relative to its growth
rate, then buy NETA at or below $60. We have set
a one year price target of $100 for the stock.
There is a thread that discusses NETA here on SI.
Mark Hoonsbeen of the IAI Regional Fund
(800-945-3863) provides the following stock
idea on Sybron (SYB 26). Below is the write up.
Last July, investors became concerned about
Sybron's internal growth rate. On these
concerns, their stock went from $27 to a low
of $16 3/8 in a few short months. One person
who is not too concerned with Sybron's
internal growth and has been buying their
stock is Mark Hoonsbeen of the IAI
Sybron is a manufacturer of value-added dental
and laboratory products. Click here to go to
their web site for more information about what
they do. Sybron is able to add growth and
profitability by consolidating smaller
companies. Initially, their focus was balanced
between acquisitions in both markets but,
lately the laboratory business has been a more
fertile ground. Mark notes that Sybron's
strategy is very positive for shareholders.
Acquisitions tend to be immediately additive
to earnings and provide excellent returns on
the Company's investment. "The core growth in
the dental and laboratory business is not very
exciting, it's the wealth of acquisition
candidates that makes Sybron an exciting story."
Smaller manufacturers are finding it more
difficult to compete. With the recent
consolidation of distributors in both dental
and laboratory markets, the economics of the
business now favor larger manufacturers. "That
means consolidation is being driven by the
economics of the business. This is not another
story built around a bull market. Sybron's
management brings real value to shareholders,"
Mark puts a lot of faith in management. "This is
a very disciplined group. They have articulated
a strategy and met the goals established
consistently." Last year the stock came under
preasure as the Company's internal growth slowed,
Mark now sees these shorter term issues turning
positive in conjunction with the continuation to
the strong long-term cased for the Company.
Sybron is estimated to earn $1.18 for fiscal year
ending in September 99' and $1.40 in 00'. "Their
stock is a good entry point for a long-term core
holding." He thinks their shares can hit $35 to
$40 within the next 12 to 18 months.
Elliot Schlang of Lynch, Jones & Ryan Great
Lakes Review (216-621-1330), provides the
following stock idea on Brightpoint
(CELL 16 5/8). Below is the write up.
When the market started to turn down at the
end in July of 1998 on concerns of the never
then ending "Asian Crisis". Any stock that
had exposure to Asia was dumped by investors.
Brightpoint was no exception. Because of
their Asian exposure, their shares went from
around $17 in July of 98' to a low of $5 in
October. Their stock has now rebounded back
into the $17 area and Elliott Schlang of LJR
Great Lakes Review thinks their stock could
Brightpoint they are the fastest growing
distributor of wireless handsets worldwide.
About 19% of their business is derived from
China and 11% of their business Comes from
Latin America. Despite the fears of "Asian
Turmoil", Brightpoint reported that their
Asian business was up a whopping 44% in their
3rd quarter versus comparable 97' revenues.
Elliott notes that because Brightpoint is
only a distributor of cellular handsets, they
do not carry the risk that manufacturers of
the phones have. "They are not dependent on
any one product and can distribute handsets
from multiple handset makers... That is why
I like Brightpoint so much!"
Elliott figures Brightpoint will earn $1.09
in 1999. He adds that Brightpoint has
historically traded between 7 and 58 times
trailing earning. Elliot thinks their stock
could trade at trailing PE of 30 sometime
within the next 12 months with their shares
There is a thread that discusses CELL here on SI.
Joe Dancy, co editor of the IFC and editor
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 ELECTRONIC COMMERCE
The shares of companies doing business on the
Internet have given new meaning to the word
volatility, featuring frantic trading of a small
base of shares, heavy insider selling and press
releases that contain more promises than profits.
''This may be the wildest bubble of the century,''
said David Dreman.
Are methods of doing business over the Internet,
known as electronic commerce, should be patentable?
The debate rages.
Individual online investors are credited with the
run-up in Internet stocks; analysts predict the
sector is near a fall.
MARKETS AND INVESTING
The fate of President Bill Clinton will probably
not affect financial markets and the U.S. economy
much according to some - despite comments by his
Stocks are overpriced by virtually any historical
measure, the global economic crisis is still very
much with us, and even the fate of the U.S. president
is somewhat in doubt. .Most analysts are predicting
the Dow will continue to lumber higher this year.
Stocks were riding an express train to the sky in
the first week of trading this year, prompting
speculation they will soon arrive at the next big
milestone: Dow 10,000.
Here come the style police. Policing "style drift,"
the term the mutual fund industry uses to describe
the intentional as well as inadvertent wandering
off course of portfolio managers, is a hot topic
these days. That's especially true given the soaring
stock market and the preponderance of mutual funds
that have stoked their performances with
concentrations of a few well-known big-cap stocks
despite investment philosophies that might suggest
different courses of action.
At least part of the explanation for the broad-based
bull run is due to technical factors that occur every
year, in what has come to be known as the January effect.
SEMICONDUCTORS & ELECTRONICS
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