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The Internet Financial Connection, April 23, 1999
Presented by Mark Johnson, Editor of the IFC
It appears exclusively on Silicon Investor
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In This Issue:
1. Cisco, Semiconductors, Attractive To White
Oak Growth Fund
3. First Data Corporation
4. Javelin Systems
5. Interesting Articles on The Internet by Joe Dancy
6. IFC/SI Reader Highlight: Look Out Schwab,
TD Could Score!
Joe Dancy, co-editor of the IFC and editor of the
The Lone Star Growth Investor
the following interview with Jim Oelschlager of the
White Oak Growth Fund. AudioInvestor.com provides an
audio version of the interview. Click the link below
if you would prefer to listen to the interview. Below
is the write up.
Named by USA Today as one of the 1999 "All Star"
funds, White Oak Growth Fund
averaged annual gains of 30.1% over the last five
years, and last year gained 39.5%. Five of the last
seven years the fund has beat the S&P 500 average,
and the five year performance rates it 5th in a
universe of over 7,000 funds.
The fund's goal is long term growth, and manager Jim
Oelschlager has a disciplined strategy to buy
companies with promising growth prospects and hold
for the longer term. Last year the White Oak Growth
Fund had a turnover of only 6% making the fund
extremely tax efficient - the average fund turns its
portfolio over around 100% per year.
Oelschlager looks for industries and companies that
exhibit long term growth characteristics, and likes
to concentrate his investments. He focuses on only
15-22 companies and would have a smaller number in
his portfolio if SEC rules would allow it. While
such concentration adds volatility to the portfolio
it increases the chance the portfolio will
outperform the S&P 500 average according to
Oelschlager, especially for those with a three to
five year investment horizons.
The White Oak Growth Fund website identifies the
top holdings of the fund, which include Cisco
(CSCO 113 1/4), Linear Tech (LLTC 62 5/8), Ascend
Communication (ASND 97 3/4), Intel (INTC 61 1/2),
Applied Materials (AMAT 61 7/8), Compaq (CPQ 23 3/4),
Eli Lilly (LLY 75 3/8), and Pfizer (PFE 128 3/8).
The fund generally likes larger size companies,
especially in the technology sector, since unlike
10 years ago it is easier to identify the dominant
companies - many of which have "massive cash flows
and no debt." This will allow many of these firms
to acquire smaller firms that will add to growth,
although Oelschlager is not sure the difficult
times seen by smaller size technology companies
"The Cisco's, Microsoft's, Intel's and Lucent's"
will look at ideas that were invented elsewhere,
and if the technology is attractive an acquisition
of such companies or technology by these firms is
a "smart way to go."
Buying attractive companies with growth potential
at a reasonable price is important, and the average
price-earnings ratio in the portfolio of 35 it is
not an unreasonable value given the growth
characteristics of some of these companies - and
considering the fact that the S&P 500 has a
price-earnings ratio of around 27. If bought at the
right price these companies will do well as the
The fund does not try to time the market and it is
a "hazardous business" - and Oelschlager notes that
they don't attempt to forecast due to these
One area that Oelschlager likes is the Internet
sector. "It's for real, but for the more aggressive
plays here the valuations are excessive." The
build-out of the infrastructure in this sector will
provide opportunities, and Oelschlager likes Cisco
Systems which should benefit as Internet traffic,
electronic commerce, and networking requirements
increase. The company has made several acquisitions
lately that will add to its expertise.
He also likes the semiconductor area, noting the
beating this sector has endured over the last few
years. Both semiconductor and semiconductor
equipment companies should do well as chips are
integrated into more and more devices and are used
Year 2000 may present small problems, but
Oelschlager does not see any major disruptions or
economic dislocations from this problem.
"Doomsayers" have always been with us, he notes,
but does not see a major market impact from the
Randall Williams-Gurian, Editor of Undervalued
Stock Ideas, usistocks.com provides
the following stock idea. Undervalued Stock
Ideas is a quarterly publication that specializes
in technology stocks. 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 37%. He provides the following stock
idea on MindSpring (MSPG 107). Below is his
MindSpring Enterprises is a leading independent
provider of dial up internet access to customers
in 45 US States and the District of Columbia.
The company's additional services include web
hosting and web domain registration, web page
design and providing dedicated internet access
accounts. Making a commitment to high speed
access, MindSpring in March announced that it
now offers its customers, in the Montgomery,
Alabama high speed internet access through the
use of cable modems. MindSpring Enterprises went
public in 1996, and completed a secondary
offering of 2.3 million shares of common stock
in December of 1998. MindSpring believes that
its subscriber turnover rate is much lower than
its competitors due its superior customer
service. MindSpring currently has an estimated
1 million subscribers and as of year end 1998,
reported approximately 21,000 web hosting
subscribers, up from 12,000 at the end of 1997.
Some of MindSpring's more significant partners
include Lycos, DoubleClick, Microsoft,
Cybermedia, US Robotics and Virtus Corporation.
MindSpring's principal competitors include,
Earthlink Network, PSI Net, Prodigy
Communications, and America Online.
Placing a valuing on most internet companies
is difficult, as many have yet to earn a dime.
However, MindSpring is currently profitable and
its history of operating in the black dates back
to its fourth quarter of 1997. MindSpring earned
62 cents in 1998 after excluding one-time items
and amortization charges on revenues of $114.7
million. The company reported gross margins of
over 70% in fiscal 1998, up two percentage
points over 1997 levels.
MindSpring's customer service mantra is winning
the company recognition from many of the national
rating agencies. Some of its more significant
awards are listed below. 1998 MVP Award for Best
National ISP, PC Computing January 1999 World
Class Award for Best ISP, PC World July 1998 Best
Buy, Smart Money Interactive, June 1998.
Part of the internet game is developing critical
mass and MindSpring is moving aggressively to
expand its customer base. In March of 1999,
MindSpring announced an agreement to purchase all
of the assets and subscribers of Internet USA of
Naples, Florida. In early 1999, the company
reported over one million subscribers as the
result of its decision to acquire from ICG
Communications its Netcom subsidiary with
approximately 400,000 individual customer
accounts and 3,000 dedicated Internet access
accounts, and 18,000 web hosting accounts in the
United States. This purchase follows MindSprings
decision in September of 1998 to acquire all of
the assets and subscribers of SpryNet from
Amercia Online for $25 million.
Our confidence in recommending MindSpring is
based on the following. The stock is undervalued.
MindSpring trades at 60 times fiscal 2000 earnings
of $1.80 and over 100 times fiscal 1999 estimated
earnings of 95 cents. These are lofty multiples,
but no where near the multiples investors are
placing on Amercia Onlines' stock. AOL currently
trades at well over 500 times next year earnings.
Investors must ask themselves if AOL's content
really worth that large of a premium. In addition,
MindSpring's earnings estimates seem conservative,
given that the number of internet users is growing
at an astonishing rate. The number of households
logging on continues to double every 100 days.
Purchasers of MindSpring shares can also rest easy
knowing that they own one of the few companies on
the web that is actually making money.
MindSpring will continue to move aggressively to
boaster its subscriber base and leverage its other
web services. These moves are possible, given that
the company can use its high price stock for
currency and that it has over $100M cash on its
balance sheet. Plus, MindSpring announced in March
the decision to issue 2 million more shares of
stock and $130 million in convertible subordinated
notes. Normally this is cause for concern. However,
MindSpring's management is being proactive to
position the company for further acquisitions or
partnerships by bringing the necessary capital to
the balance sheet in an aggressive fashion. It is
not outside the realm of possibilities that
MindSpring might itself become an acquisition
candidate. We look for their stock to hit $150 in
There is a thread that discusses MSPG on SI.
Tom Ricketts of the Sands Capital Management,
provides the following stock idea on First Data
Corporation (FDC 45). Below is the write up.
Tom Ricketts of Sands Capital Management likes
to focus on specific companies that lead and
dominate attractive growth industries, while
holding them for long-term appreciation. This
strategy has done well for them. During the past
5 years (ending 12/98), they achieved an annual
return of 33%, versus the S&P 500's 24% return
during the same time period. During the last 10
years, their annual return was 25% when compared
to the S&P's 19%.
One company at the top of their list is First
Data Corporation (FDC). They are a leader in the
payment processing industry. They process credit
cards, debit cards, checks, smart cards and are
aggressively moving into processing Internet
transactions. "When you buy goods online, you
typically use a credit card to do that. FDC is
a leader in that type of processing," says Tom.
"On a global basis, they lead in electronic
payment and transactions. In the old world, you
would use cash or check. With the increase of
technology and computers, consumers are more
frequently using credit cards and that is making
up a larger share of the payment system."
Tom notes that FDC has been faced with some
challenges during the last 2 years and is now
beginning to come back into favor. One of their
first challenges was that they acquired First
Financial Management (FFM). FFM operated in areas
that were non core businesses or in any relation
to FDC. They divested about 15% of their business
so, they could focus primarily on the payment
processing side of the business. Revenue growth
slowed into the single digits from the mid teens.
"This divestiture is now complete and earnings
will not be affected by this going forward."
FDC has recently formed an alliance with
Microsoft and offers a new service called
Transpoint. This service will allow for bills
to be paid over the Internet. Click here for
more details. "They are the dominant leader in
their industry, have great management, good
alliances and I am confident they will continue
to expand and build out their services",
Tom feels comfortable with earnings estimates
of $1.73 this year and $1.95 in 00'. He notes
that the S&P 500 trades at about 29 times year
00' earnings and FDC is only trading at 23 times
comparable earnings. He thinks it should be
trading at a comparable market multiple. Tom
believes that FDCs' stock will appreciate over
time and will be recognized by investors. His
firm plans on being a long-term share holder of
There is a thread that discusses FDC on SI.
Bill Chidester of Elite Micro Stocks
(914-277-2194) provides the following stock
idea on Javelin Systems (JVLN 13). Below is
the write up.
Javelin Systems is a maker of point of sale
touch screen computer terminals primarily
used in restaurants. Their stock hit a high
of $17 1/2 in January and settled down in
the $13 area. About 2.5 million shares were
sold by the company and insiders. "This has
put pressure on their stock during the
short-term," says Bill Chidester of Elite
Bill adds what is exciting is that in
January of this year, Javelin signed an
agreement with McDonalds to become one of 3
vendors approved to supply their touch screens
in new and existing restaurants. Bill figures
that Javelin is likely to receive up to 40% of
the orders from McDonalds because, they have
the best price and performance characteristics
out of the 3 systems being offered.
Bill mentions that Javelin's computers will be
used in a variety of industries, such as the
convenience store market and not only be limited
to the restaurant industry. Javelin provides the
systems, consulting services and support to their
customers," says Bill, "They have a variety of
revenue streams and are not limited to the making
of touch screen computer terminals."
Bill notes, the shares of Javelin are trading at
about the same level they were a year ago, before
there was significant earnings being generated.
He figures they should earn $0.55 for fiscal year
ending June 99' and $0.75+ in 00'. "The underlying
growth is so powerful, a high PE is warranted for
their stock." He thinks their stock could more
than double within the next 12 to 18 months once
their growth potential is realized by the street.
There is a thread that discusses JVLN 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
Bubble Has Burst On Internet Shares, Analyst Says.
Internet Slump Spurs Nasdaq Plunge.
For most home Internet users, going online
involves placing a call from their modems to a
local phone number. But the question of whether
a call to the World Wide Web is truly ''local''
has become a hotly contested issue in the
In a major blow to Internet bandits who capitalize
on typographical errors to lure people to their
own World Wide Web sites, a federal judge in
Alexandria ruled that the domain name
"wwwpainewebber.com" be stripped from the owner of
a pornographic Web site.
The Internet revolution has allowed companies
like Cisco Systems to compete on the same level
as its more powerful competitors like Nortel,
Ericsson, Alcatel, and Lucent.
Reader Book Reviews Create Controversy at Amazon.Com
Televisions could be chirping ''You've got mail!''
as early as this summer, as America Online prepares
to bring its market-dominating Internet service to
PC's, NETWORKING, Y2K AND SEMICONDUCTORS
Compaq Acts Quickly To Stem Woes: Events
Compaq CEO Pfeiffer Walks Away With $278 Million:
Potentially Could Have Gotten Much More.
Making the machines that make semiconductors has
always been the quintessential cyclical industry.
After three down years -- and an especially
lousy 1998 -- chip equipment firms should be primed
to soar in 1999. But some factors are holding them
back for now.
"The industry has never gone through a period
where it had three bad years in a row like this,"
said Mel Thomsen, a senior industry analyst with
In Latin America, Y2K bug expected to be more
devastating, widespread In this part of the world,
''the public doesn't protest with phone calls and
letters - it riots and destabilizes the government.
There's lots of potential for that,'' said Ian Hugo,
deputy director of Britain's industry-backed
MARKETS AND INVESTING
NASDAQ May Extend Hours To 9 p.m.
One-third of American workers have not saved for
retirement, according to the Employee Benefit
Research Institute. Furthermore, 58 percent of women
surveyed have no idea how much they need for
retirement, the National Center for Women and
Stocks Multiply Executive Rewards.
"Tech is for sale" at Fidelity, as portfolio managers
sell off "stocks that have performed well since
October 1998 and now have high price/earnings,"
Slightly smaller companies with a value bent may
be coming back Dow's Surge May Signal A Shift
to Value Stocks.
My comfort came after attending a seminar run by
two executives at Mercer Management Consulting,
who indicated that they believe Amazon has
discovered and acted on the business model of
The FBI arrested a 25-year-old computer engineer
yesterday and accused him of originating a fake
news story that swept across the World Wide Web
last week and bid up the stock of a
telecommunications equipment company.
Investors piled into basic-industry stocks in
what increasingly appears to be a shift away
from the household names that had dominated the
market's long advance.
SAY what you want about people who do nothing
all day except trade their stocks, but say
this - they are saving Wall Street right now.
A Premature Obituary for Capitalism: Asia Did
Not Cause Meltdown.
Asian Economies on Upswing: Depend on Reform.
The chairman of the Federal Reserve Board, Alan
Greenspan, expressed concern Friday about what
he sees as a rising tide of protectionist
sentiment in the United States.
Shiv Naimpally, who recently provided a write
up in the 3/5/99 edition of the IFC on Nortel,
is an individual investor and an Internet
Financial Connection reader. He provides the
following commentary on Toronto-Dominion Bank
(TD 52 3/4). Below is his write up.
The TD (Toronto Dominion) Bank (NYSE:TD) is a
stock worth looking at. Everyone knows that
Schwab is the #1 on-line broker. Who is #2? Not
E-trade or Ameritrade. Its Waterhouse Securities.
They happen to be owned by a Canadian bank, TD.
They recently indicated that they planning to
have a limited public offering of shares in
Waterhouse (TD will continue to own a majority
of the shares though). With the capital they
raise they can use it to increase their on-line
market share. They can do this by buying another
on-line broker or increasing their marketing
If they were to buy one of the other discount
brokers, they could easily match or surpass
Schwab in size. Near the end of last year they
stopped marketing their services because their
systems were unable to keep up with the amount
of new customers they were adding. The near
term potential, even as the #2 on-line broker,
is intriguing. The value of their on-line
brokerage alone makes them a potential takeover
target. Goldman Sachs has been rumoured to be
interested in them.
Over the long term, things look even more
interesting. TD has branches around the world.
That means they know the regulatory and financial
ins and outs of many countries. They already
operate discount brokerages in the USA, Canada,
U.K., Australia and Hong Kong. They are the #2
discount brokerage worldwide. In Q1 their global
discount brokerage revenue increased 87% from the
same quarter a year ago. They are thus well poised
to become a major player as a global on-line
And TD is not just an on-line broker. TD is a
major North American Bank with a $15.5 US Billion
market cap. They have the usual offerings such as
credit cards, mortgages, insurance, mutual funds,
etc. Net income for Q1 was $312 Million CDN
(about $210 Million US) so for the year it should
approach $1 Billion US. More financial information
is available on their web site at
The stock currently trades at around $52, off its
52 week high of $61. No matter how you look at it,
the stock looks very attractive.
There is a thread that discusses TD on SI.
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 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.
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