MORE GO SHORT OPINION ARCHIVES

COLTY (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. 

MSPG:(Mindspring) Mindspring, 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. 

LU (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 short positions.  

FTE (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.

PG (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.