week of November 8th 1999: An all new stock ideas section featuring
long and short ideas.
MORE GO SHORT OPINION
(ENERGIS PLC): Energis PLC was formerly 100% owned by
National Grid PLC. ENGSY operates a national voice and data network that offers service to
35,000 business sites nationwide. The company's network consists of 5,000 km of fibre
optic cable. ENGSY has entered into a joint venture with Deutsche Telekom and France
Telecom to form a new venture called Metroholdings which will operate a new local metro
area telecom network in larger U.K. cities. The company's stock has hitched a ride on the
mania for telecom shares following Colt Telecom's meteoric rise. The stock has risen from
20 in January, and 50 in May to its present 86. We regard the stock as severely overvalued
at present levels. We look for any easing of investor's mania for telecom firms to send
these shares into a serious correction. We expect the stock to find downside support at
the 50 level. We would take profits now before investors take a clearer, less manic, view
of the industry's fundamentals.
(COLT TELECOM GROUP PLC): Overvalued, over rated, a
true tulip stock. Colt is a fast growing provider of telecom services to customers in
London and Europe. COLTY has 635 km of fibre optic cable and 1370 customers. By the end of
the year COLTY will have operations in London, Frankfurt, Hamburg, Dusseldorf, Amsterdam,
Paris, Zurich, Brussels, Madrid, and Milan. The company's fast growth, and recent mergers
in the industry combined to light a fire under the stock. The stock has increased tenfold
since May 1997, and has more than doubled since late April. We regard the optimism as
excessive. The company will not show a profit this year or next year. We expect
competition resulting from deregulation to knock down profit margins across the telecom
industry. The rise of these shares has been driven by a combination of over eager (and
under informed) investors, momentum players, and massive short squeezes. The near vertical
rise in these shares recently should be a warning to take profits now. Historically, when
a stock chart shows a rise straight up there is usually an equally swift fall. COLTY is
displaying additional worrying technical patterns. MACD, Stochastics, and RSI have all
shown negative divergences during the recent rise. Weekly ADX is at a dizzying 62
and daily ADX is turning down from 47. We look for this stock to find first downside
support at 130. We expect to see it trading at a still expensive 85 within the next year.
COLTY has surpassed Vodafone as our favorite British short position.
INTERNET SERVICE PROVIDERS: The internet access providers' stocks have been on a tear over the
past month as an "anything the internet touches turns to gold" mentality
has whipped the buying public into a frenzy. We view this optimism as wishful thinking.
The access providers operate in what is essentially a commodity business with few barriers
to entry. We believe that competition for customers will lower margins in the business. We
foresee the PE multiples accorded the IAP's falling to the same 20 times earnings multiple
accorded their larger rivals the Baby Bells. This is the second time this group has had a
euphoric buying spree envelop it--the first occurred shortly after Netscape's IPO. The
stocks rose to dizzying heights and then promptly plummeted the first time around. We
expect the same cycle to repeat this time. Our two favorite shorts are the two big
national ISP's: Mindspring and Earthlink.
like its chief rival Earthlink, serves individual subscribers with little internet
experience. MSPG has jumped from 61 three weeks ago to 109. In mid January the stock
fetched only 28. News of a 3 for 1 stock split sent the shares up 25 points over the
course of 2 days. This price surge has lifted the stock to mind boggling valuation levels.
MSPG is now trading at 12.2 times trailing sales. MSPG is trading at a PE of 116, and at
67 times next year's estimates with a PEG of 1.6. The stock's technical performance has
been unable to keep up with the surging share price. Negative divergences in money flow
and CCI are apparent. Distribution has begun to take place. OBV has turned down, and
weekly RSI has turned down with strong divergences. The daily ADX at 42 and the weekly ADX
at 56 have both turned down. We view this as a signal to sell long positions and enter
shorts in MSPG. Our first downside target is the mid June level of 61.
ELNK(Earthlink): Earthlink has jumped from
10 1/2 last August, and 54 in late May, to 90. The shares are trading on a lower multiple
than Mindspring--"only" 57 times next year's estimates and at 9 times trailing
sales. The stock surged following news of a 2 for 1 share split. The technical indicators
on the over valued ELNK have turned sharply negative. ELNK has completed a wave 5 up. OBV
has turned down sharply. Money flow, daily RSI, weekly RSI, and the negative volume
index have exhibited sharp negative divergences during the recent run up. Weekly ADX has
given a sell confirmation turning down from a sky high 54. We look for ELNK shares to fall
to the 47-54 level seen in early June.
(Lucent Technologies): ATT offspring LU has been
having a banner year. Rising earnings, an aggressive acquisition led push into the
internet equipment and networking fields, and excessive investor enthusiasm have made
these shares a momentum player's dream stock. The telecom systems and software giant has
seen its shares rise 150% since the beginning of the year. Unfortunately for those now
buying the shares, the stock now discounts earnings gains several years into the future.
LU now trades at 59X this year's earnings and 49X next year's estimates with a PEG of 2.35
(based on 1999 estimates). The shares are at a price/sales ratio of 4.3. Despite
Lucent's market leading position, revenue growth of 13% and an expected 5 year growth rate
of 21% do not justify these nose bleed valuation levels. Based on their recent
selling patterns, insiders seem to feel the same way. The company may be executing on all
4 cylinders, but overvaluations always have a way of correcting themselves. We feel that
on a technical basis the stock's bull run is over and a correction is due to set in. The
shares are at the .618 Fibonacci extension level off of their wave 4 bottom. We
expect this important resistance level to hold and feel a wave 5 top is in place.
Strong negative divergences have appeared in Money Flow, which has been in a downtrend
since peaking in early May. Weekly ADX at 59.3 has turned down, which we always take as a
serious warning of an impending change in trend. The first downside support should be at
the 55 day moving average of 78. The next downside target is at the June 1st lows in
the 67-72 range. Our ultimate target is 61. It's time to take long profits and initiate
(France Telecom): EMU lit
a fire under all European markets this year, and French shareholders have benefited to the
tune of 45% so far this year. French phone company FTE has outpaced the red hot French
market this year rising 100% off its early January lows. Rapid expansion of its mobile
telecom business, the signing of strategic alliances, and most importantly--rampant
investor enthusiasm for the telecom sector have contributed to this doubling in price. The
shares have risen 36% in the last 2 months alone. We feel that the telecom sector is due
to cool off. Merger and deregulation mania have driven the sector to extremely overvalued
levels. Any bids that do occur will not happen at levels much above present prices.
The industry's fundamentals, and the synergies to be gained from mergers, do not justify
the extremely generous valuations given to this sector by investors. When sentiment
cools off, share prices will deflate. Investors have chosen to give FTE a premium rating
based on the growth of its mobile business, but they have overlooked the deterioration of
the fixed line side. There is a downward trend in revenues from fixed line telephony, and
rate cuts have exasperated the situation. Overall revenues at FTE are growing at just
3.3%, and traffic growth at 8.3%. We look for per minute rates to decrease in the cellular
business as mobile telephony becomes more wide spread. Profit margins will narrow in both
the fixed line and cellular sectors. With limited revenue growth and increasing
competition for customers in its home market, we view FTE as extremely overvalued. The
shares are trading at 2.8 times sales and 4.6 times book value. With profits expected to
grow just 10.7% a year over the next 5 years, FTE is trading on a prospective 1999 PE of
24.1 with a PEG of 2.25 . We would initiate short positions now before investors wake up
from their momentum driven dream and start to value this company on its fundamentals.
LHSP (LERNOUT & HAUSPIE SPEECH PRODUCTS): Belgian
LHSP is the recognized leader in the field of digitized speech. The company's product
lines include automatic speech recognition, text to speech, and digitized speech
compression. LHSP shares have been given a boost this year by the introduction of several
new products and the signing of key alliances with major industry players. Lernout's new
Voice Express Plus will be promoted by Microsoft to users of the new Windows 98 operating
system. Speech recognition products for voice paging, automotive electronics, email, the
internet, dictation, and consumer goods are all slated to be introduced this year. The
company has a bright future as the technology leader in its field. Unfortunately, the
company's current share price fully discounts its growth for the next 3 years. LHSP is
trading at a PE of 76.4, and at 53.2X 1999 estimates. Any failure to deliver on
earnings expectations could lead to a sharp sell off in the stock. We think that the
Windows 98 linkup will deliver less than the current share price warrants. We believe many
business users will wait to upgrade their operating systems until the introduction
of Win NT 5.0 next year. The stock's technical picture is worrisome. The shares hit a peak
of 68 in late April and have failed to near this level again. A failed double top has
formed in the stock's chart pattern. Distribution has been taking place for the last 2
months. Money Flow has shown divergences with price on the latest run up, and has been
falling since late April. OBV has turned down. Weekly MACD and RSI have both turned down.
Weekly ADX hit a sky high 57 and has turned down. We look for LHSP, which has risen
from 17 last December, to find support around the May 27th low of 44. We would take
profits in long positions in LHSPF now, and rebuy the stock after it has corrected to more
reasonable valuation levels.
CMGI (CMG INFORMATION SERVICES): CMGI
stock can be considered a proxy for investor sentiment towards the internet industry. CMGI
operates young internet concerns and runs venture funds focused on the internet.
CMGI's wholly owned subsidiaries include the direct marketing arms CMG Direct, SalesLink,
InSolutions,and On-Demand Solutions. Its majority owned subsidiaries include Planet
Direct, NaviSite, Engage Technologies, Accepiter, ADSmart,InfoMation, and The Password.
Its venture capital arm has large interests in GeoCities, Lycos, Reel.com, and Planet All.
The company has benefited from the internet mania that has swept investors in the
first half of this year. The stock is up 800% since last Halloween. The shares have
risen 155% since June 5th. We like the this company's fundamentals, but we see no way to
justify the stock trading at 19 times trailing sales. At this point, the valuation of
these shares far exceeds any inherent value. We believe that the mania for internet stocks
and anything with the word .com in it has reached its bubble peak. As shares have soared
skyward over the past month, the underlying technical picture has been deteriorating.
Distribution has been taking place among internet stocks as market pros sell to a
public caught up in a mania of South Sea Bubble proportions. The technical situation
for CMGI shares is in sharp contrast to its soaring stock price. MACD and RSI are in
downtrends. Money flow has shown negative divergences during the recent run up and is
falling. Weekly OBV has turned down. Weekly ADX at 51 has peaked and is turning down. We
look for the first downside support for CMGI shares to be near their July 9th price of 61.
We expect them to fall to the 62% fibonacci retracement level around 53. We
would avoid holding long positions in these shares at these mania driven valuation levels.
(PROCTER & GAMBLE): Shares of nifty fifty
member Procter & Gamble, the maker of such household brands as Tide, Charmin, Pampers,
and Crest, had been an investor favorite until an earnings warning today knocked 5% off
the shares lofty price. The company met expectations for the 4th fiscal quarter, but
announced that earnings growth will slow from the 14% pace of the past 5 years . Volume in
the quarter was softer than expected as a competitive pricing environment in the U.S. and
Europe took its toll. We expect competition and depressed Asian markets to continue to
hurt earnings at PG. Even after today's fall these shares, down 10% from their July 6th
high of 94, are still priced higher than the company's 13% a year growth prospects
warrant. PG is trading at 3.1 times sales, 29.2 times 1999 earnings estimates, with a PEG
of 2.25. These shares were held aloft by their perceived safety. We expect a rerating of
the shares as investors rethink their strategy of buying name brands as a refuge of
safety. Technically the situation has been deteriorating for PG shares for a while, and
today's warning was just confirmation of the bleak technical picture. Strong negative
divergences in weekly RSI, Stochastics, and MACD were observed during the stock's recent
highs. Money Flow, currently in a steep downtrend, has shown strong negative divergences
with price since mid 1997. OBV is in a strong downtrend. Today's fall dropped the shares
below their 100 day moving average. We expect the technical situation to continue to turn
increasingly negative, and look for the first downside support to be near the 50%
retracement level at 75. Our final downside target for these shares is the 65-67 level
last seen in mid September 1997.
Investors have flocked to the perceived safety of
familiar name brand consumer goods big cap stocks as they have sought refuge from the Asia
fallout and tech sector earnings warnings. Toothpaste and soap giant Colgate-Palmolive has
been a prime beneficiary of this reallocation of assets. A better than expected second
quarter earnings report sent CL shares further into overvalued land. Earnings rose 16%,
and the company announced that it would use excess cash to buy back shares and increase
advertising spending in an effort to gain market share. Despite the joy with which
analysts greeted the earnings report, we find a few causes of concern. Sales during
the quarter actually fell 1.9%. Earnings increases can not be sustained indefinitely with
flat sales. Sooner or later, all of the cost cutting and restructuring gimmicks run their
course and earnings growth decreases. Colgate's anemic sales growth does not justify the
current valuation levels. The shares are trading at 3.2X sales, a 1998 PE of 37, and on a
prospective 1999 rating of 32 times earnings. CL has a lofty PEG, based on 1999 earnings,
of 2.36. Historically, stocks with PEG ratios more than twice their growth rate have not
proven to be good investments. The lack of insider buying during the past year also gives
us reason to second guess the analysts who have upgraded these shares to a strong buy.
Technically, warning signs have appeared. Distribution has been taking place during the
latest rise. Money Flow is in a downtrend, and OBV has been showing strong negative
divergences during the recent rally. Weekly MACD, Stochastics, and RSI all are showing
strong divergences. %R has given a sell confirmation. We look for a downward break in the
share price as Procter & Gamble's earnings warning causes investors to reevaluate the
wisdom of buying overvalued big caps in competitive industries. Our first downside target
is the 38% retracement level in the 77-79 range, where strong support exists. If the
overall market enters a downtrend, we look for this support level to be broken and the
shares to trade down to the 67-68 level last seen in mid January.
|(ANF) Abercrombie & Fitch Co: ANF
is a retailer of of classic American sportswear. The company's shares soared after it
repositioned itself to appeal to a young hip crowd. ANF shares have risen 300% since April
1997. The company's clothes have become a fad among the late teen, early 20's crowd.
Despite the company's impressive growth, we have turned negative on the shares. Trading at
32 times earnings, the shares are now fully valued. We believe that current growth
rates are unsustainable. Trends come and go. Witness the soaring shares (and earnings
estimates) during the recent cigar fad, and the stocks' sudden crash (and tumbling
earnings estimates) when the fad ended. Trends in fashion, and among the late teen
market change even faster. Recent months have seen the share prices of several other teen
apparel marketers plummet after they were unable to meet unrealistic growth expectations.
We believe that the craze for ANF clothing is at its peak and that estimates of future
growth will come down dramatically as trends change. After a first half runup in prices,
the retail apparel group has entered a downtrend.
We believe that ANF's share price has peaked. The shares have
completed a wave 5 up pattern. Distribution is taking place. Money flow showed strong
negative divergences at the recent peak. Recent attempts at a rally have been stopped at
the fibonacci 62% retracement level. Weekly ADX has given a sell confirmation. After
peaking at 52, ADX has fallen below 40. We expect the shares to pop up today with the
announcement that the company will be joining the S&P 400. We would use this jump in
prices to enter short positions in ANF. Our year end target for the shares is 40.