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The Internet Financial Connection, April 23, 1999 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. Cisco, Semiconductors, Attractive To White Oak Growth Fund 2. MindSpring 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! 7. Disclaimer ---------------------------------------------------------- 1. techstocks.com Joe Dancy, co-editor of the IFC and editor of the The Lone Star Growth Investor members.aol.com provides 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 audioinvestor.com 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 [http://oakassociates.com/mutualwhite.htm] has 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 is over. "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 companies grow. 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 uncertainties. 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 in telecommunications. 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 Y2K problem. ----------------------------------------------------------------- 2. techstocks.com 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 write up. 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 9-12 months. There is a thread that discusses MSPG on SI. Subject 7249 ------------------------------------------------------------------ 3. techstocks.com 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", says Tom. 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 their company. There is a thread that discusses FDC on SI. Subject 20465 ---------------------------------------------------------------- 4. techstocks.com 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 Micro Stocks. 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. Subject 10185 ----------------------------------------------------------------- 5. techstocks.com Joe Dancy, co-editor of the IFC and editor 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 ELECTRONIC COMMERCE Bubble Has Burst On Internet Shares, Analyst Says. iht.com Internet Slump Spurs Nasdaq Plunge. techweb.com 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 telecommunications industry. globe.com 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. washingtonpost.com 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. technologypost.com Reader Book Reviews Create Controversy at Amazon.Com post-gazette.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 TV sets. mercurycenter.com PC's, NETWORKING, Y2K AND SEMICONDUCTORS Compaq Acts Quickly To Stem Woes: Events Mirror History. washingtonpost.com Compaq CEO Pfeiffer Walks Away With $278 Million: Potentially Could Have Gotten Much More. nypostonline.com 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. mercurycenter.com "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 Microdesign Resources. mercurycenter.com 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 Taskforce2000. globe.com MARKETS AND INVESTING NASDAQ May Extend Hours To 9 p.m. globe.com 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 Retirement said. detnews.com Stocks Multiply Executive Rewards. chicagotribune.com "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," nypostonline.com Slightly smaller companies with a value bent may be coming back Dow's Surge May Signal A Shift to Value Stocks. washingtonpost.com 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 future. nypostonline.com 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. washingtonpost.com 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. mercurycenter.com 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. nypostonline.com ECONOMIC A Premature Obituary for Capitalism: Asia Did Not Cause Meltdown. iht.com Asian Economies on Upswing: Depend on Reform. nypostonline.com 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. iht.com ----------------------------------------------------------------------- 6. 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 of Waterhouse. 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 discount brokerage. 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 tdbank.ca 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. Subject 19650 ----------------------------------------------------------------------- 7. techstocks.com 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. ========================================================================= To Subscribe: Send an email to <mailto:ifc-request@mLists.net> with "subscribe" in the message body. Please tell a friend about this newsletter :) Shop the best prices on the Web! webmarket.com | ||||||||||||
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