Beachcombing With the Insiders
Jonathan Moreland
06/24/02 - 09:09 AM EDT
It was another bad week for the market as investors continued to
focus on economic and valuation worries that we've been highlighting weekly
in
InsiderInsights.
The poor retail sales figure for May (down 0.9%) apparently caught
some pundits by surprise, but the real surprise to us is why anyone
expected consumers to continue their torrid spending pace, given the
highly indebted state of many consumers. This was one of
the reasons we felt strongly about making bets against this market nearly
two months ago, going long the
Profunds UltraShort Fund
and shorting
SPDRs. And we are not closing these winning bets yet. Insiders are
still flashing very bearish signals on the prospects of the overall market.
Most talking heads don't expect consumer spending stats to continue
downward, but they now have to consider the possibility. It is well-known
that the U.S. economic turnaround (and therefore, to some extent, the
world's economic turnaround) owes quite a lot to U.S. citizens spending like there's no tomorrow. If this spending music stops, there is little else
to carry on the tune of recovery.
One more bad month of spending stats will prompt the phrase "double
dip" to gush forth in everyone's favorite newspapers, as economists weigh the possibility of dipping into another short recession.
But let us also point out some good news. Although we are prepared
for a miserable summer for the stock market overall, we are also prepared
to make some opportunistic purchases as pessimism takes good stocks down
with the bad ones.
So, far from advising investors to go to cash and head
for the beach all summer, we view this current market as an excellent one
for beachcombing -- that is, picking up interesting stocks from the flotsam
being cast about in this stormy market. (OK, so we're financial writers, not
poets.)
Consider Corio
We're beginning to do this with some old recommendations we were
previously stopped out of. Our initial recommendation of application
service provider
Corio worked out extremely well. We picked it at $1.18
in mid-March and saw it trade up to $1.75. When profit-taking and market
pessimism started taking it back down, we were stopped out at $1.50, a 27%
gain in just over a month.
Being pessimistic about the market, we didn't fall over
ourselves to recommend Corio again as it subsequently hovered around $1.25
or even $1.15. But when it falls back below $1.10, like it did a couple of
weeks ago, we would suggest picking it up.
We still think this stock is a good long-term bet. Although the company
still has quarters to go before its industry will improve enough to offer
profits, we believe Corio's business of helping firms cope with the hassles
of managing and upgrading enterprise software from the likes of
Oracle,
PeopleSoft,
Siebel Systems(SEBL Quote) and
SAP is a valuable one.
Sure, the sales and stock prices of these large software providers are in
the tank, but there is a lot of their software already in place.
Outsourcing management of their systems to application service providers
like Corio is a cost-saving move for many firms.
We also note that after rebounding from the lows it hit after
Sept. 11, Corio has found support all year near $1. Given Corio's
cash on hand of $1.54 per share as of March 31, it's a little surprising
that support isn't higher. But investors recognize that the company will
lose more money before returning to profitability, so trading below the
latest stated cash per share figure is hardly bizarre.
We also view the company's revenue recognition policy, as explained
to us by Chairman George Kadifa, as conservative, and we like that the firm
separates both the revenue and expense line items in a straightforward
manner. Kadifa further indicates that there may be more room for
cost-cutting.
This quarter is not going to be stellar, but that's no surprise. We
still expect the firm to end June with about $63 million of cash and
short-term investments, which equates to $1.23 per share. And we feel the
stock will pay off if business starts to improve in the fourth quarter. If we're wrong, we
think the odds are still good we will be able to exit the stock at around what
we paid.
Network Equipment
Another stock we think is an excellent opportunistic purchase is
Network Equipment. We're sitting on a sizeable loss on this one right now, but we are sticking with it, primarily because the company has cash of over $4 per share. We also believe Network Equipment will be able to return to profitability in the next year.
In one way, at this price the stock has a similar investment thesis to
Corio's. Both companies have refocused their product lines as a result of the
changed tech environment, and they have also cut costs to reduce their cash
drain. Both are also trading near their cash levels. So if and when
tech spending does rebound, these two firms should show excellent profits
if they have bet correctly on the new focus of their products.
With Network Equipment and Corio trading at or below present cash levels, we think
these two are better beachcombing stocks than, say,
Vitesse
Semiconductor, a stock we
wrote about
in April that has not been kind to us. Although we view Vitesse as a tech
company that has reduced costs and refocused its product line admirably, it still trades for two times the company's present (and declining) cash on hand.
Vitesse has been trading poorly, though, and could become attractive flotsam
in the near future.
