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The Training Wheels Are Off

Ben Holmes

Fundamentals? What the...? Weird, but I am hearing this word more and more often, both on the tube and from the analysts and traders I talk to every day. I thought nobody cared anymore. As Jim Cramer likes to say, "Wrong!". Investors are going old-school and beginning to look again at factors like dividend yields, revenues, earnings and cash reserves in the stocks they buy.

Imagine that.

Thursday morning on TV I heard someone trying very hard to tout REITs as an emerging theme in this stock market. They quoted Abbey J. Cohen as being positive on the real estate trusts and mentioned dividend yields as high as 8%. I laughed, but then it began to eat at me and I had to take a look at the stocks in that group. Bingo! REITs have indeed caught a bid.

This causes no end of problems for me in that I have long considered REITs to be a dead sector in the IPO market. Now I have to go back and reread each of the REIT deals in my system. There is no rest for the wicked.

Face-Off Time!

Thursday marks the completion of my first year writing for TheStreet.com. Yes, a full year has passed and in spite of the attempts by my editor Lee Montgomery to have me institutionalized or otherwise driven insane, I have held on to my faculties. To mark the occasion I've decided to do something fresh, something I have never done before. Let me explain.

Last July I wrote a piece called The Coming IPO All-Star List. In it I listed a handful of deals on the calendar that I liked. The three IPOs were: Redhat Software (RHAT Quote), Foundry Networks (FDRY Quote) and Drugstore.com (DSCM Quote). The first two rocked, the last is trading at half its issue price.

In my defense, you had plenty of time to take profits on that one. Drugstore.com didn't break issue until March 17, seven months after the IPO. What was great about doing this column was that it allowed me to step ahead of the immediate calendar and scan for hot deals that were not yet on the radar screens of most investors.

Well, it's time for another list, but this time with a twist.

Today I go head-to-head with my sidekick Michael Falbo. Mike sits next to me all day and is responsible for a great deal of the IPO content that appears on the ipoPros.com web site and here on TheStreet.com. I like Mike, and watching him come up in this business has been a very gratifying experience. The guy is a machine.

Today we get to see just how much he's learned about what makes a great IPO. Today the training wheels come off. Below you'll find two lists of deals, Mike's favorites and mine. In our own words we tell you what we like and why.

Here's what I like:

• Embarcadero Technologies (EMBT Quote): This maker of e-business software had me impressed from the moment I read the filing. Its products are heavily weighted toward database management applications and its client base is incredible. Revenue is doubling annually and Embarcadero posted increasing profits in each of the last three years. This is a deal that deserves to work big.

• Lexent (LXNT Quote): The company provides outsourced telecomm network services. Essentially they operate between the large facilities-based operators, like AT&T (T Quote) or MCI WorldCom (WCOM Quote), and the customers of these companies, like Internet service providers and competitive local exchange carriers. Lexent is doing something right because its year-to-year revenue growth is averaging right at 72%. Profits? Oh yeah. At $9.25 million, fiscal-year 1999 net income was three times that of fiscal year 1998. Robust! The underwriters are total champs and the market loves these networking deals.

• Tycom (TCM Quote): This is a world-class company coming to market. Tycom bills itself as the "world's leading supplier of undersea fiber-optic networks and services." Basically Tycom's built and installed more transoceanic fiber than anyone on earth. Its revenue is growing at an impressive pace and it has turned the corner to profitability in 1998. Last year Tycom posted a profit of $163 million. Goldman Sachs is great with these mega-telecom deals.

Here's what Mike Likes:

• New Focus (NUFO Quote):The company develops fiber-optic products for next-generation optical networks. This technology rocks!! What else can I say? Its customer list includes Agilent (A Quote), Lucent (LU Quote), and Nortel Networks (NT Quote) -- they're in good company. Revenue is on a steady climb, and the company's experience in the field makes me a believer.

• Tycom: Let's get back to the basics, as in, how much profit are you actually generating? After reading this prospectus I had to take a deep breath. Between fiscal year 1998 and fiscal year 1999, Tycom's revenue increased by $356 million. Its net income -- yes, net income -- increased by $11 million. The company has laid over 350,000 kilometers of undersea fiber. Looks good from here.

• Crossworlds Software (CWLD Quote): The company produces e-business infrastructure software. The customer list is impressive. Incredible revenue growth and a decreasing net loss make me think that the management actually knows what they're doing. H&Q, Dain Bosworth and Thomas Weisel as underwriters. Score!

There you have it, two hard working guys, scratching and clawing to dig up the next crop of highfliers. Which of these will deliver the biggest returns for IPO investors? Only time will tell. One note, however, if Mike's picks outshine mine we'll have to provide him with a bigger office, one to accommodate his swelled head.