Message-ID: <24419399.1075840976113.JavaMail.evans@thyme> Date: Tue, 29 Jan 2002 12:12:26 -0800 (PST) From: newsletters@123jump.com To: alewis@enron.com Subject: ISN Ones to Watch: Plain Vanilla Or Rocky Road? Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Internet Stock News@ENRON X-To: alewis@enron.com X-cc: X-bcc: X-Folder: \ExMerge - Lewis, Andrew H.\Deleted Items X-Origin: LEWIS-A X-FileName: andy lewis 6-25-02.PST INTERNET STOCK NEWS[tm] http://www.123jump.com ISN Ones to Watch 1/29/2002:Plain Vanilla Or Rocky Road? ________________________________________________________________ TABLE OF CONTENTS 1. Overall Sentiment 2. Observations 3. Portfolio Results & Changes 4. Alexander, Iliana and Maneva 5. The Paradox of the Fed 6. From the Readers 7. Sonny T's Latest Picks 8. Basing Patterns 9. Comment Welcomed ----------------------------SPONSOR----------------------------- Get a FREE Interactive CD Guide to Selecting Winning Stocks... and 10 FREE issues of Investor's Business Daily! No obligation. Nothing to cancel. Offer available in the U.S. only. Subscribers within the last six months are not eligible. http://www.123jump.com/partners.htm?id=86 ------------------------------***------------------------------- 1. Overall Sentiment The financial press spent the prior weekend while I was in South Beach "apologizing" for Alan Greenspan's Jan. 11 remarks concerning the dim prospects for an economic recovery in 2002. Stocks continued to decline. It took an actual appearance by the Maestro himself to give stocks a boost. In an appearance before a Senate committee, the Fed Chairman practically repeated his Jan. 11 statements. However, he also asked that the market interpret them in a bullish light. It did. The result was three straight days of rally following a sell-off on Tuesday in the holiday-shortened week of Jan. 21-25. Those up days helped the popular indexes close out the week with slight gains. The value of my ShareBuilder plan of 33 stock positions also closed out the week with a slight gain of less than 1%. The big winner in this passive, buy-and-hold portfolio, for the week was Alliant Tech (ATK). In the sake of fairness, the biggest loser was Micro General (MGEN). That's encouraging, of course. But, where will investors, mainly the institutional crowd, decide to place client money after the flood of Q4 earnings results subsides? Investor's Business Daily this past week noted that there were net inflows of money into the overall market during October and November. December's preliminary figures indicate some net outflow of funds from both stocks and bond funds. Indeed, the rally since Sept. 21 appears to have stalled, particularly for the larger capitalization issues in the Dow 30 and the S&P 500. The mid and small cap averages, although down from levels reached earlier this month, have been hit less hard. IBD also notes that money continues to flow into value and small cap stock funds and away from large cap and growth funds. In the paper's "20 Rules for Investment Success" section, Rule 19 says, "Find out if the market currently favors big- cap or small-cap stocks." A check of the daily new highs list does corroborate the trend that smaller capitalization issues remain in favor. First Data Corp. (FDC), an S&P 500 component, and currently held in my ShareBuilder account, did reach new highs last week. That has been the exception rather than the rule. Wednesday's CNBC Squawk Box segment featured a regular guest economist from a Wall Street firm (can't recall the firm, but does it really matter?) The economist opined that that the "plan vanilla small and mid cap companies" would treat investors well in 2002, while the Big Dogs would experience a rough and rocky road. Unless they're in the industry, many investors don't know about these small and mid cap stocks. We tend to shy away from the unfamiliar and prefer to stick with the familiar. This worked during the roaring 90's. The bear market of 2000 and 2001, though, has taught us that celebrity stocks can experience periods where only the most devoted of fans stick with them. The question investors must answer is: Will the market continue to like plain vanilla, or it will gravitate to chocolate, strawberry and the more exotic flavors? More important, though, is how many scoops of plain vanilla becomes one scoop too many? For investors closely watching their "investment calories," it is something to ponder. 2. Observations On my weekly Saturday taxi ride to the supermarket, the price for a gallon of regular gas at the convenience store on Market Street was $1.03.99, down a whole penny from last week. Perhaps prices have stabilized for the moment. In fact, we're hearing the word 'stabilized" a lot these days in the guidance offered by tech companies during the current Earnings Season. Tellabs (TLAB), the telecom equipment firm, comes to mind. Reports by major brokers concerning the semiconductors, particularly the equipment-making sector, maintain they have seen the bottom. When it cones to flavorings, in my view, it should be taken with the seasoning of your choice. Each Earnings Seasons also tends to produce some choppy, or erratic, trading in stocks. Companies can report bottom- line results that beat the forecast. Still, they sell off. The usual excuse is that the speculators bought much earlier on the rumor and sold on the news. Sometimes, a good stock with rosy prospects will pull back after reporting results because some Big Dog stock analyst will say something like, "Yes, earnings beat our forecast, but the profit margin for the past quarter was down 0.1% from the prior quarter, and that has us worried." So what else is new from Wall Street? Meanwhile, IBD has begun a regular segment, "The Smart Investor," that profiles individual investors who practice its investing and analytical disciplines. After reading this segment for the past few months, I have come away with the understanding that these folks don't practice the buy-and-hold approach - as I understand it. Instead, they constantly look for opportunities to buy a stock that is just beginning its initial break out to new highs. Then they monitor its progress from a standpoint of how volume relates to price. This means that on average, they aren't strictly buy-and- hold investors, intending to stick with a position for more than a year, much less several years. In its most general of terms, the best way I know how to explain this approach is to remind regular readers of a situation way back in the early 70's when I used to hang out in a branch office of a regional retail brokerage firm in a small town in North Carolina. A broker was on the phone with a customer. He told the customer, "A good stock is one that's going up, and a bad stock is one that's going down." William O'Neil, IBD's publisher, puts it this way: "All stocks are bad. They're only good as long as they're going up." 3. Portfolio Results & Changes In his books, audio, and video productions, Bill O'Neil advises that individual investors should maintain a portfolio of just a few stocks. This goes against the grain of what is known as "Modern Portfolio Theory," an investment strategy that stresses broad diversification. Quite often, I hear the pundits on the TV stock market channels say that an investor should put no more than 5% of available capital into any one position. What they are stressing is Modern Portfolio Theory, a concept that was created in 1990. This strategy is certainly suited for the so-called "passive investor," or a person that doesn't have the time to spend hours watching the CNBC tape or reading the three sections of the Wall Street Journal from front page to back page every day. Indeed, diversification is a passive investor's best friend. Over-diversification, however, is a hazard for an active- investor, or a person seeking short-term performance in his or her positions. The market only provides the active investor so many opportunities to enter and exit with a nice gain. When that opportunity is missed, due to watching too many stocks, the overall results often suffer. The stocks from the Ones to Watch Model Portfolio that I inherited in February when I was assigned the task of writing this newsletter, was eventually whittled down to six stocks. These six were purchased at the market open July 25. Six months have passed. Let's see how they've done, based on the Jan. 25 closing price: SEI Investments (SEIC), from 46.45 to 41.72, down 10% Alloy Inc. (ALOY), from 15.37 to 19.74, up 28% Pharmaceutical Product Development (PPDI), from 36.76 to 28.85, down 22% Daktronics (DAKT), from 9.12 to 7.06, down 23% EarthLink (ELNK), from 16.42, to 9.30, down 43% SonicWALL (SNWL), from 20 to 20.36, virtually unchanged. After six months, there is only one winner, Alloy Inc., which is somewhat of a surprise. Internet fans should be familiar with EarthLink. Perhaps that is the problem facing this sector of the economy and the stock market. The company continues to report deals and good news about itself, but the bottom-line results from the quarter ended Dec. 31, and the guidance says this ISP that has to constantly has to compete against giant America Online won't pass muster, despite favorable court rulings that allows it access to the same POP telecom lines dominated by AOL. Daktronics is a micro cap company that makes electronic scoreboards, a business that does well when times are good. However, times aren't so good, and the company continues to issue guidance that says future results, like EarthLink's, that will fall short of Wall Street expectations. I have to give up these stocks to what I suppose are the bottom-fishers. As the saying goes, "One man's junk is another man's treasure." As for the replacements that I hope will make up for a 43% loss and a 23 ,respectively, here are the picks that I will "purchase" at the market open on Wednesday, Jan. 30 (the second day of a two-day FOMC meeting!): Internet content company eUniverse (EUNI), a micro cap company that is beginning to hit the so-called "radar screen" of institutional type investors (read: micro cap funds). In a PR dated Jan. 24 from Los Angeles, the company reported a Q3 profit versus a year-old loss and raised guidance for both revenue and earnings for Q4 ending March 31, and for fiscal 2003. The company recently acquired for between $50-$55 million online advertising firm L90 (LNTY). The second pick is PETsMART (PETM), the No. 1 pet products chain. Tuesday, Jan. 22, the Phoenix-based firm raised guidance for its fiscal Q4 sales growth and said that it will consolidate its PETsMART.com into its overall operations. This company has been running a lot of TV ads lately to retail customers, but the company is certainly more diverse than that, having catalog operations that sell products to the horse market. Believe it or not, the U.S. horse market is bigger than one might think. Giddy-up! My water-stock portfolio purchased Aug. 1 - Tetra Tech (TTEK), American Water Works (AWK) and SCP Pool (POOL) - are all in the black, with the AWK being the best performer, up some 30%. I also initiated a position in Philadelphia Suburban (PSC), a water utility, in my ShareBuilder plan on Jan. 22. I also intend to add more shares in 2002. The two retail positions taken on Jan. 3 - long Bed, Bath & Beyond (BBBY) and short Tiffany & Co. (TIF) - have thus far been an embarrassment. BBBY was bought at 33.49 and closed Jan. 25 at 32.40 for a paper loss of 3.25%. TIF was sold short at 31.05 and closed Jan. 25 at 35.38 for a paper loss of 14%. Bill O'Neil has said the stock market is neither efficient nor rational. Here's BBBY, a consistent 30% grower in the home furnishing market giving positive future guidance, with a trailing 12- month P/E ratio of 47 that I'm paying a 17% premium to own. Meanwhile, TIF, famous for its Robin's egg blue gift boxes, sells at a trailing 12-month P/E of 31, even though the management projects a growth rate in 2002 in the single digits. I still track this Sweet 16? portfolio of high-profile tech stocks that was created in late July. Space limitations won't permit me to report on the latest results, but I will provide a list of the group: Business Objects (BOBJ), Veritas Software (VRTS), i2 Tech (ITWO), Micromuse (MUSE), Alcatel (ALA), Nokia (NOK), Comverse Tech (CMVT), Vodaphone Group (VOD), Genentech (DNA), Network Appliance (NTAP), Check Point Software (CHKP), EMC Corp. (EMC), Juniper Networks (JNPR), CIENA Corp. (CIENA), BEA Systems (BEAS), Corning Corp. (GLW). 4. Alexander, Iliana & Maneva A trio of 123jump.com correspondents recently issued thoughtful reports on its home page. Alexander Vantchev reported Jan. 15 on BEA Systems (BEAS), which I track through the Sweet 16? In an e-mail, I provided Alex with this group of 16 stocks and also made particular mention of Business Objects (BOBJ), the French business intelligence software firm. Alex views BEAS as a survivor niche player in the enterprise software space that can manage to hold its own versus the Big Dogs - Oracle (ORCL), International Business Machines (IBM) and, of course, Mr. Softee (MSFT). BEAS is scheduled to report earnings in February, since it operates on a fiscal that is one month after the traditional periods that end in Dec.-March-June-Sept. The URL for Alex's report: SEE: http://www.123jump.com/story.htm?tory_id=13979 In some brief e-mail correspondence with Alex, I asked him about the Russian stock market, the best performer of all the world's exchanges in the past 12 months. "And don't even look at Eastern European markets," Alex replied, "if you don't know more than a lot about them. They are not real, or at least they are much, much different from those in the West. These numbers can be anything local lords want them to be. Russian economy's margins are virtual. Nickel Paladium (Norilsk Nickel) is produced in Siberia by what is very close to slave labor. Gas (Gazprom (OGZPF) just runs down a pipe and someone controls the tap. In the East, the politicians control the business and not the other way round as elsewhere." Given what has happened with Enron (ENE), American investors might tend to quibble with that last statement in Alex's e-mail. Speaking of the non-traditional fiscal year, the overwhelming majority of American retail companies complete their fiscal year Jan. 31. They do this because of what they like to call the Christmas Sell-Through Season that also accounts for the period in January when they mark down items in order to rid their shelves of excess (read: the stuff that didn't sell) inventory. In other words, when it comes to retail, investors should be mindful of what I like to call the "Philadelphia Department Store Marketing Philosophy" - Get it off the shelf, it's been on the shelf too long. Come February, 123jump.com's retail correspondent, Iliana Sahandjieva, will have her hands full digesting the latest financial results from this broad and diverse group that actually makes up two-thirds of the U.S. economy. On Jan. 22, Iliana issued a report on three discount retailers, each with the name "Dollar" in their corporate monikers. SEE: http://www.123jump.com/story.htm?story_id_13985 Given what has happened to K-Mart (KM), one group of financial pundits is saying that Wal-Mart (WMT), Target (TGT) and the up-and-comer Kohl's (KSS), will continue to take market share from the original creator of discount retail, which was first known as E.J. Corvette's. The other group of pundits is saying that by declaring bankruptcy, K-Mart is a great speculation. But, the same has already been said about Enron and Exodus Communications. Monday, Global Crossing (GX) joined the growing list of companies seeking Federal protection from creditors. Meanwhile, the retail distributor of lottery tickets gets a little cut from each purchase. In other words, buy it at 2 cents, sell it at 4 cents. It's something to ponder. When it comes to getting that "little cut from each purchase," I'll stick with the position in my ShareBuilder plan of First Data Corp. (FDC). Moving on to 123mump.com's third correspondent, Vanya Maneva, we come to an emerging branch of technology known as "nanotechnology." SEE: http://www.123jump.com/story.htm?story_id=13983 In a report issued Jan. 21, I would have to agree with Vanya's assessment of this technology that it is something for the future, something along the lines of at least 10 years into the future. Going back to an earlier time in 2000 when I used to correspond with a colleague (prior to its purchase by 123Jump.com) about the biotech industry, I mentioned that Watson & Crick discovered the double helix in 1954. My colleague commented that it took nearly 40-45 years for this scientific breakthrough to actually become a profit- making enterprise for only a handful of biotech firms. I think Vanya has provided a balanced, yet factual, approach to this emerging branch of technology. Of course, folks that have an interest in this field would like to see Wall Street bring these companies public on an ASAP basis, much like the dot-com mania IPO market of 1999. So far, Wall Street is taking a "wait and see" approach. Don't hold your breath for nanotech. 5. The Paradox of the Fed As was promised in an earlier newsletter that I would make comment about the Federal Reserve System, which we now usually refer to as simply, "The Fed," it seems that the more things change, the more that they appear the same. Yes, we all know that Alan Greenspan, former Jazz musician, has been at the helm of the world's most powerful Central Bank for something like 18 years. Still, I want to remind readers that the Federal Reserve System was created through an act of the U.S. Congress in 1912. There are what I would term "constitutional sticklers" among the readership who maintain that this legislation, were it ever to reach the U.S. Supreme Court, could actually be declared unconstitutional. We all know this won't happen - at least in the years that I left as an inhabitant on the Big Blue Marble. Given the recent comments from Alan Greenspan and how it affected the stock market, I think that it is appropriate that I include a passage from Richard Ney's "The Wall Street Jungle," a book that was published in 1970, and is now only available through used-book sources: "Because the Fed is part of the 'financial community' under the aegis of the Stock Exchange (see Chapter 9), the values and the ideology of the Exchange have become absolute and now impose themselves on the credit policies of the nation. The Fed's wisdom in raising interest rates is now revealed as no more than a myth: in the words of Congressman Wright Patman, 'for the Fed to raise interest rates in order to cure inflation is like pouring gasoline on a fire to put it out.'" I find it interesting that during 2000 and 2001, Alan Greenspan constantly "bitched" about inflation as it pertained to the price of a gallon of regular gas before the various branches of the U.S. power structure, while also providing his usual oblique explanations as it pertained to the economic concept of "wage push inflation." 6. From The Readers Larry W. e-mailed with the following comment about a stock he's strong on (as is Wall Street) these days: 'I enjoy your comments and have been getting your e-mails for a couple months. When you bought MIMS for your nieces, I checked it the next day and [it] started down and I placed a buy order at 10 to think to steal it on the way down. It never filled and I now I kick myself for not accepting the good fundamental and just buying with stops. I later saw it in IBD highlighted in yellow." Larry W. continues: "Another yellow stock is UTSI, which is a California company with a near pure play on the wireless market in China. Last fall, I did a tour of the major Asian cities and could see the great amount of development. UTSI has Asian officers in their mid-forties and a growth rate of about 40%, but also a PE above that level. They report earnings and have a webcast on Jan. 28, 1:30 PST. Visit www.utstar.com. Keep up the reports and weekly trips to the store. Meanwhile, here's a URL, courtesy of Yahoo! Finance of UTSI: SEE: http://finance.yahoo.com/q?s=UTSI&d=c&k=c1&a=v&p=s&t=6m&l=on&z=m&q=b 7. Sonny T's Latest Picks Our ex-IBM employee turned full-time trader e-mails me nearly every day about his stock picking/stock trading system. Sonny T wrote Sunday, Jan. 27, that his system is increasing his positions from $10,000 to $11,000 per position from a couple of weeks ago "to put the profit to work. In my view, this is a good trading strategy. Using the profit to buy more stock actually results in what we are all seeking: The Power of Compounding. Or, as Albert Einstein put it: "The most powerful force in the Universe (at least from an investment standpoint) is the power of compound interest." When it comes to investing, there are winners and losers. For those folks who read IBD, particularly as it pertains to the Smart Investor segment, there are folks out there who make a personal commitment to be consistent winners. Or, as Sonny T puts it in his latest e-mail: "My goal is to make money. This system provides great opportunity, but the trick is to refine a way to make money with it consistently." I like the way Richard Ney, as it pertains to investment success, defined consistency: "Better a steady dime, than a seldom dollar." As for the picks, Sonny T says his system currently likes AVNT, BZH, CHBS, CTX, DFXI, DHI, FCN, FRED, GISX, GTK, LEN, MIM, RGIS, RIT, TTIL. I find it fascinating that his system has picked Regis Corp. (RGIS), a nationwide chain of hair salon studios. Talk about a "plain vanilla stock"! 8. Basing Patterns A colleague, Bob Howard, who publishes a monthly fee-based newsletter from Springfield, MO that I receive for free, calls his product, "Positive Patterns." Bob is a buy-and-hold guy who won't back off from his stock picks. One of them is a food stock, Smithfield (SFD). Talk about a company that is "shareholder friendly," if you're a person, to use the term this TV celebrity chef Emeril LaGasse uses, "Pork Fat Rules," then Smithfield is the stock for you. As for this Basing Patterns business, Richard D. Wyckoff, an early pioneer in technical analysis, was always on the lookout for stocks moving sideways within a narrow range. Investor's Business Daily often writes about stocks displaying stock charts in basing patterns. Like IBD, Wyckoff, who published a newsletter in the first 20 years of the 20th Century, was picky as it pertains to "basing patterns. Wyckoff and IBD share a common analytical criterion: "tight", as opposed to "sloppy" base patterns. In other words, the base should be in a rather narrow range, which indicates that speculators are avoiding the stock. It also implies that professional investors are making careful bids for the purpose of accumulating a good line of shares at a price that falls within a certain target range. Here are charts, courtesy of Yahoo! Finance, that display what I like to call "Wyckoff Patterns." SEE: http://finance.yahoo.com/q?s=IMNY&d=c&k=c1&a=v&p=s&t=6m&l=on&z=m&q=b SEE: http://finance.yahoo.com/q?s=eclp&d=c&k=c1&t=6m&a=v&p=s&l=on&z=m&q=b ----------------------------SPONSOR----------------------------- Get a FREE Interactive CD Guide to Selecting Winning Stocks... and 10 FREE issues of Investor's Business Daily! No obligation. Nothing to cancel. Offer available in the U.S. only. Subscribers within the last six months are not eligible. http://www.123jump.com/partners.htm?id=86 ------------------------------***------------------------------- 9. Comment Welcomed A resident of Wilmington, NC, Dave Jennings performs market research for Ticker magazine, a monthly publication for financial professionals. Dave enjoys receiving reader comment and replies to all e-mails. He can be reached at djennings@ec.rr.com and djennings@ticker.com. ----------------------------------------------------------- INTERNET STOCK NEWS (ISN) (c) 2001 Disclaimer: The material herein is for informational purposes only and should not be deemed an offer or solicitation on our part with respect to the sale or purchase of any securities. http://www.123jump.com/disclaimer.htm ----------------------------------------------------------- ----------------------------------------------------------- You are currently subscribed to Internet Stock News Daily as: alewis@enron.com To Cancel your subscription please go to: http://123jump.com/confirm.htm?listid=117996&mid=115298 To Change your subscription please go to: http://123jump.com/letters.htm?S=L&email=alewis@enron.com