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INTERNET STOCK NEWS [tm] http://www.123jump.com ISN Ones to Watch 1/22/2002: Return From South Beach _______________________________________________________________ TABLE OF CONTENTS 1. Overall Sentiment 2. Observations 3. Weekly Portfolio Results 4. Sonny T's System Picks 5. From the Readers 6. Trading Methods & Strategies 7. Comment Welcomed -----------------------------SPONSOR--------------------------- New FREE Report. "Armadillo Stocks: 5 Investments That Win By Never Losing" shows how to make BIG PROFITS without big risks. It's FREE. Nothing to buy, try or cancel. Click here: http://www.ppi-orders.com/index.htm?promo_code=0ZX158 -------------------------------***----------------------------- 1. Overall Sentiment I spent five days last week visiting 123Jump.com headquarters in Florida's trendy South Beach. Ironically, stock prices also headed south. The charts of the popular averages, which have mirrored the trend of the typical stock since the Sept. 21 bottom, have "rolled over" from the peak that occurred in the first five trading sessions of the year. However, it should be pointed out that the S&P 600 Small Cap Index rallied from a 52-week low to an all-time high during this span of some 14 weeks. In the reports I read over the weekend, financial pundits blamed Alan Greenspan's continued concern for the U.S. economy in remarks made Jan. 11 as the reason for the sell- off for the week of Jan. 14-18. In the past 20 months - especially for techno-stock fans - when all else fails to explain why prices decline, one can always blame Dr. Greenspan One More Time. Whatever the reason, the question confronting the trader and the buy-and-hold investor is: Will the recent wave of selling end relatively soon, or will it continue a bit longer? Moreover, if the selling continues, will the roughly 2,000 stocks that rallied off 52-week lows in late September and early October revisit those levels? Despite Wall Street's way of making any stock look good no matter how dismal its future prospects, in my view, investors should take what they say with more than a few grains of the flavoring of your choice. The dreams that some investors may hold for their favorite tech stocks of 100% returns (and substantially higher!) in the next 12 months should be weighed against what I believe is the reality of a weak recovery in the second half of the year. As always, the financial media maintains its focus on the familiar (read: the Big Cap names and the stocks that rallied the strongest during 1998-2000), while paying a modicum of attention to emerging companies, many of which virtually ignored the bursting of the Tech Balloon. In many respects, this balloon is still deflating, while money continues to seek other places where it believes it will be treated well. The lesson? Richard D. Wykcoff, an early pioneer in technical analysis of equities, observed that the stock market does repeat the same patterns, but not always with the same stocks. A good example of how the market in a stock can remain out of favor for years and then take off for the stratosphere can be demonstrated in the max chart, courtesy of Yahoo! Finance, for Adobe Systems (ADBE), the leading maker of graphics software used in Internet and Desktop publishing. SEE: http://finance.yahoo.com/q?s=ADBE&;d=c&k=c1&a=v&p=s&t=my&l=on&z=m&q=l As one can observe, Adobe stock enjoyed a steady appreciation from 1988 to 1995. From 1996 to 1999, a period of three years, the share price was locked in a narrow range. Only the most resilient and confident of long-term shareholders held on during this slow period of no significant appreciation. After the end of the bear market in October 1998, Wall Street discovered the Internet (or did the Internet discover Wall Street?). Being a prime source for software used in Web page design, Adobe stock soared on an astounding acceleration in quarterly revenue growth, and, of course, profits. Now, the market in the stock accords Adobe a 12-month trailing P/E ratio of 43 times earnings, even though the management has warned Wall Street that the company may experience single-digit annual revenue growth in 2002. This matter of P/E ratios that don't match up with expected future earnings still has many professional money managers uneasy about committing large amounts of capital into high- profile tech stocks. 2. Observations In the work I've done for Ticker magazine beginning last October, I've learned from my visit to HQ last week that the December cover story on 529 College Savings Plans generated the most reader response since 123Jump.com acquired the property in 2000. Folks who read this newsletter can access the article by going to www.ticker.com. This savings plan is the result of federal legislation that has many tax advantages for investors concerned about securing a higher education for their children and grandchildren. It is also extremely complicated. Ticker will publish more articles in the future about this plan. I wholeheartedly encourage readers to investigate this investment venue. In my view, it will be an issue of increasing importance in the next decade. After I returned from South Beach on Friday, Jan. 18, I had a conversation with Mark, the groundskeeper, where I reside in Wilmington, NC. After giving a brief synopsis of my visit, Mark offered his observation that 90% of the U.S. population wants to live on either the East Coast or the West Coast, and that over time the middle portion of the continental United States will be empty. That might be a stretch in the short-term, but I would want to encourage readers to view a map of Australia. As some of us are aware, this island continent is comprised of two geographic areas - the Coast and the Outback. 90% of the population resides along the coast. It is something to ponder. On the drive back to Wilmington, I picked up a Public Radio broadcast from some Florida college by a television professor who hosts a weekly show about the Internet. Goodness knows there are fewer Internet outlets out there that talk about nothing but the Internet for the truly addicted in order to bolster their confidence, and to remind them that, "Yes, I am still in the right business instead of majoring in restaurant management." On the drive back to Wilmington, I got off Interstate 95 and took the "Coastal Highway," or U.S. 17, through Georgia, South Carolina and North Carolina. Obviously I encountered lots of stoplights and retail shopping strips, but that was my intention: to get a feel for how business was faring during the winter season in these areas that do most of their business during the warm weather months. To be honest, these areas along the Carolinas and Georgia coasts have evolved into year-round regions with enough full-time populations to keep businesses operating 12 months a year. While Dot-Com and Tele-Com stocks were bombing in the past 20 months, the stocks of recreational vehicle makers have rewarded the patient investor. Stocks from the group include Winnebago (WGO) and Coachmen Industries (COA). True, the advances haven't equaled how well Internet Capital Group (ICGE) did from summer of 1999 to January 2000. The folks who cashed in their profits from ICGE stock are now building second homes and using the interest from what is left over to provide them with a comfortable lifestyle. What's CNBC, they ask? The biggest problem we encounter every day is deciding where to go for dinner. Yes, even for the wealthy, life is still inherently problematical. Meanwhile, Warren Buffett, the Oracle of Omaha, along with a host of other stock market sages, tell the public via outlets such as CNBC that investors should tone down their expectations in the current decade. Since Buffett admits he doesn't understand technology, he sticks with businesses such as insulation and carpets. Can these companies appreciate in the next ten years? Certainly. Will they score 10-fold, 20-fold, even 50-fold gains in this time span? Not likely. Will they make millionaires out of some investors? Yes, provided they started out with an initial investment stake of $500,000. Based on the Rule of 72, or a rough guide for how many years it takes for an investment to double at a certain rate of annual appreciation, at 7% a year (including compounding), $500,000 reaches $1 million in about 10.28 years. But what about us groundlings still working on those first five figures of net worth, much less the Holy Grail, or as Bob Brinker prefers to call it, the Land of Critical Mass, occupied by those folks worth seven figures? In a nutshell, there are three ways to achieve Critical Mass. First is buy low with up to 99% of available capital and sell high. Second is buy high with up to 99% of available capital and sell higher. Third is give up your day job and trade like hell with up to 99% of available capital. The first two require some patience and the ability to withstand these painful "corrections" the stock market experiences every six months to three years. The third alternative requires that an individual investor relinquish most, if not all, of his or her understanding of financial fundamentals and concentrate entirely on the twists and turns that all equities experience in the short- term - even down to a few seconds. It should be pointed out that the most difficult alternative is the latter - and the most addictive in nature. I may as well be honest, and call it, for lack of a better term, gambling. Still, gambling is a profession, provided one adopts a professional's attitude and treats it as a business. Lastly, a check of the price for a gallon of regular gasoline, based on what I read on the sign before making the turn onto Market Street was $1.04.99, down from $1.07.99. The February oil future, also called the "nearby contract," that trades at the New York Mercantile Exchange (NYMEX), ended the week at $18 a barrel, and very close to the low for the past 12 months. I think the oil traders are wondering about what kind of deal was stuck was by George W. Bush and Vladimir Putin last December that may override the efforts by Saudi Arabia (read: OPEC) to reduce daily output in an attempt to shore up prices for its basket of crude oils. Nobody talks much about that meeting between these two world leaders, because nobody, including the Washington Press, really understands what happened. Meanwhile, the Russian stock market remains the best performing of all the world's stock exchanges in the past 12 months. It is something to ponder, versus all the ongoing talk since 1999 about the importance of China as it pertains to American and European companies and their international expansions into China's telecom infrastructure. Personally, I find it fascinating to observe. On a global scale, I want to remind readers about something Walter Wriston, the former of CEO of Citibank, which later became Citigroup after its merger with Traveler's Insurance, once said about investing: "At any given moment, the supply of available capital is finite, yet there are an unlimited number of places where it can go. It will tend to go to those places where it believes it can be treated well." 3. Weekly Portfolio Results Given what has happened to me in the past week, it's been a struggle to figure out what the results were for the stock portfolios I maintain for the regular readers. This "water-related" portfolio of three stocks for the week ended Jan. 18 works out this way: American Water Works (AWK) ended the week at an all-time high. Shareholders approved the company's pending acquisition by RWK, a German water utility, at $46 a share. Tetra Tech (TTEK), the water pollution consulting firm that does a lot of business with the U.S. Government, finished unchanged since its purchase date Aug. 1 at a split- adjusted 17.18 a share. Ginney7 wrote this past week about not receiving shares after the recent 5-for-4 split and what should be done about it. A couple of days later, she wrote to say that the certificates showed up in the mail. By certificates, she means actual paper documents that signify ownership. In this age of online transactions, how many of you readers out there actually possess physical stock certificates? SCP Pool (POOL), the distributor of swimming pool supplies, also finished flat since the Aug. 1 purchase at a split- adjusted 26. Based on what I've written about people wanting to live on the coast in the U.S. and how much people seem to want to be near water in general, I think that over time, my investment will in this stock, a component of the S&P 600 Small Cap Index, as is Tetra Tech, will continue to appreciate. Isn't it interesting, after October 1998, how stocks outside the technology sector have performed on the upside? I wish they could have done as well as Panera Bread (PNRA), another S&P 600 stock, in the past 18 months. Meanwhile, the stocks from the original Ones to Watch Portfolio, including Exodus Communications, which declared bankruptcy, are all but forgotten, except for the die-hard readers from those by-gone days. As it stands now, a lot of money from retail investors has poured into Enron on the bet that they can double their money from 30 cents a share, or whatever the going price is these days, to 60 cents a share. And then what? The share price bombs again to 2 cents a share and all these retail speculators bet on a bounce to 4 cents a share? Still, that's a double. Someone betting $500,000 at two cents a share becomes a millionaire before short-term capital gains taxes if the stock doubles to 4 cents a share. It takes all kinds to make a stock market: the speculators betting on "dead cat bounces" in bankrupt stocks to the so- called "true investors" that examine the possibilities for a possible double in something like five years. Meanwhile, the stock portfolio I created, based on the July 25 market price at the open has produced only one winner: Alloy Inc. (ALOY), up roughly 30% since the purchase at the market open on July 25. The rest: SEI Investments (SEIC), Pharmaceutical Product Development (PPDI), Daktronics (DAKT), EarthLink (ELNK), and SonicWALL (SNWL) are all in the red. The biggest loser is EarthLink, down more than 60% from the purchase price July 25 at 16.42. Coming up is the six-month period that ends Jan. 29 for these six stocks. At least one of them will have to leave at a substantial loss, (guess which one), while the others may or may not remain. Regular readers that keep up with retail stocks are aware of how well several have done in the past 12 months. The gains aren't on the same level compared to how Internet Capital did in six months during the Internet Mania period from summer of 1999 to January 2000. Meanwhile, I recommended a long position in Bed, Bath & Beyond (BBBY), purchased at 33.49 at the market open on Jan. 3. The stock closed at 31.82 Jan. 18. I also recommended a short position in Tiffany & Co. (TIF) at 31.05 on the same date at the market open. The stock closed at 33.75 Jan. 18. I'm losing on both positions. Not by a lot, mind you, but a loss on paper is still a loss. I still keep up with the 16 stocks I've been tracking since late July. I call this group the Sweet 16? Tech Portfolio. They all rallied since the Sept. 11 Attack on America to some degree, some more than others. However, in the past five to ten trading sessions, the charts for these 16 stocks display what is known as a "rollover pattern" that is similar to the popular indexes. Stocks from the group displaying this pattern include: 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. (CIEN) Corning Corp. (GLW) The remaining duo that haven't turned south in the past ten trading sessions are Business Objects (BOBJ) and BEA Systems (BEAS). 4. Sonny T's System Picks Our former IBM employee turned full-time trader wrote this week to say his trading system since October 15 is up 10% versus the Dow (plus 5%), SPY (plus 4%), FFF (plus 5%) and the QQQ (plus 11%). In his latest e-mail, Sonny T noted that conservative stocks such as Wm. Wrigley (WWY), Philip Morris (MO) and BB&T (BBT) have held up well during the bear market. I would also note that small cap stocks outside technology have also performed well, as many readers can attest. As of Saturday, Jan. 19, Sonny's system has picked the following stocks: Acredo Health (ACDO) Affiliated Computer (ACS) Argosy Gaming (AGY) Direct Focus (DFXI) Dianon Systems (DIAN) Global Imaging Systems (GISX) Gtech Holdings (GTK) Knight Transportation (KNGT) Kronos (KRON) Michael's Stores (MIK) TTI Team (TTIL) As always, Sonny's system places 8% stop loss orders on these positions in keeping with the Investor's Business Daily method. As for my own trading, I've only made two since the beginning of the year, both in i2 Technologies (ITWO). I am up 6.6% in this cash (not tax deferred) account. I still hold 10 shares of MTR Gaming (MNTG) in the custodial accounts for my three nieces. Although the stock is down from the recent high of above 17, these three positions are still in the money. However, had I held on to either Royal Caribbean (RCL) or MIM Corp. (MIMS), these positions would be ahead roughly 100% instead of 40%. It just makes me sick. But, that's the stock market. 5. From The Readers Aside from receiving her Tetra Tech shares, Ginney wrote last week to say that she is strong about Nestle (NSRGY). "No one will listen when I write about Nestle (NSRGY)," she says. "This is a top pick, yet no one buys or trades it. Recently it bought my Ralston Purina for a song and before that a company that I also own that does laser surgery to replace eye glasses. This is one of the top-most Swiss companies, recently split at $50 and is now trading at about $52. They have so much in the till that that they were able to help bail out Swissair. I enjoy sharing the wealth and think if this ever came over to the Big Board it would run away." Karim asked: "Just wondered if you could suggest to me at least three small cap companies which you think will do a bit better in 2002." Sonny T's pick of Argosy Gaming (AGY), a S&P 600 Small Cap Index component, looks like a good stock for 2002, despite its success in the past 12 months. Gaming stocks remain one of the strongest sectors of the market. A reader a few weeks ago asked about Paxar (PXR), another index component. This company makes labels for the apparel industry and should be considered a value play. The third is Petsmart (PETM), a leading retail chain that sells pet supplies. Manish Shah, my CEO, also likes PETM. He suggested two larger companies that provide software to the financial services industry: Advent Software (ADVS) and Fiserv (FISV). Congratulations are in order to the readers last year that suggested other small and micro cap names such as Bradley Pharmaceuticals (BPRX), Neogen (NEOG), Ansoft (ANST) and eUniverse (EUNI). A reader named ljpj21 asked for an opinion gleaned from a message on the SUNW board on Yahoo! The initial portion reads: "My trading philosophy is this. I watch stochastic waves and moving averages. From a stable of 50 high Beta stocks, I go long those with high revenue growth rates regardless of profitability, and I short stocks with high P/E's and little near term prospect of improvement in earnings." The synopsis of my reply: Stochastic is a technical indicator that measures short-term money flow to determine whether demand or supply is greater. Moving averages refers to the average price measured over a specific time period. I often write about 50-day and 200- day simple moving averages (SMA), but there are others of shorter duration, such as 10-day, 13-day, 20-day. Traders track these short-term averages to determine whether the stock is due for short-term advance or a short- term decline. Beta is a measure of volatility, or the degree of magnitude that a specific stock can move during both bullish and bearish periods in comparison with a known benchmark. The usual benchmark is the S&P 500 Index, which is always given a Beta ranking of 1.0. A stock with a Beta of 2.0, for example, can advance two times as much as the S&P 500 when the market is bullish. Likewise, when the market is bearish, a stock with a Beta of 2.0 is capable of a decline two times greater than the S&P 500. -----------------------------SPONSOR--------------------------- New FREE Report. "Armadillo Stocks: 5 Investments That Win By Never Losing" shows how to make BIG PROFITS without big risks. It's FREE. Nothing to buy, try or cancel. Click here: http://www.ppi-orders.com/index.htm?promo_code=0ZX158 -------------------------------***----------------------------- 6. Trading Methods & Strategies An understanding of a specific stock's Beta coefficient can help us in our trading. Returning to i2 Tech (ITWO), a stock that I've traded twice this year, we have an example of how a stock with a high Beta ranking behaves. SEE: http://finance.yahoo.com/q?s=ITWO&;d=c&k=c1&a=v&p=s&t=6m&l=on&z=m&q=b I2 has a Beta coefficient of a whopping 3.37, which implies that it is capable of advancing 3.37 times greater than the S&P 500. Indeed, from a low last September of 2.98, the shares advanced to a recent high in early January of 9.41, or roughly 3.3 times. Also, one should notice from this bar and volume chart how the price has risen in a series of waves. A wave of buying is followed with a counter wave of selling. When the selling wave is exhausted, another wave of buying is initiated. In addition, readers should also make note of the increase in daily trading volumes for this stock since Sept. 11. 7. 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@ticker.com or djennings@ec.rr.com. ----------------------------------------------------------- INTERNET STOCK NEWS (ISN) © 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 Ones To Watch 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
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