If you're feeling whipsawed and confused at the start of the fifth month of stock trading this year, let me offer some visual reorientation.
Imagine that you are in a helicopter flying over an Olympic marathon. The lead runners have completed the first 40% of the race, and they are starting to put a lot of distance between themselves and the rest of the pack. Indeed, as you look closely through binoculars you notice that a great number of runners who began swiftly and swelled with pride now lag far behind.
Now you peer even more closely and notice a curious thing: A nontrivial number of the runners near the front are wearing the same colored jersey. Yes, they're from the same country. And you wonder if it's just a coincidence -- or whether it suggests that one nation has simply done the best job of preparing its athletes for victory.
Blink twice now and visualize the stock market. After more than one-third of the year, it's fair to suggest that the market's leaders are the ones that are not just strongest -- but probably also have the most stamina to complete the race ahead. And that's doubly true if the leaders are largely from a single, fast-growing sector of the economy, since their staying power is less likely to be a fluke.
Stocks With Staying Power
I developed a simple screen at the close of trading on May 1 that sought stocks with market capitalization greater than $1 billion that were beating a benchmark, the
Nasdaq Composite Index
, for the year. It netted 768 stocks. I then ranked them by year-to-date return and sorted the top 100 by industrial sector.
The leaders, by a mile, were semiconductor and semiconductor equipment makers -- they took 29 of the top 100 spots. Second were communications-equipment makers. Only three biotech companies made the list, despite the group's blazing start this year.
If the market behaves as it has in the past, at least a few of the 2000 year-end leaders should be in this pack. And considering that they have gone through trial-by-fire in the past few weeks, my guess is that they make unusually strong choices. The top 10 names by this measure are
Advanced Micro Devices
Ballard Power Systems
Just for the sake of science and contrarians, it's only fair to list the companies with $1 billion market caps that have most underperformed the benchmark. I captured 936 stocks; of the worst 100 of these, 28 were Internet firms and 11 were software makers. The tin-cup 10 in this group:
VA Linux Systems
Internet Capital Group
The difference between these two sets of names: GlobeSpan and Virata, for example, both make chips for the DSL (digital subscriber line) modems that bring low-cost, high-speed Internet connections to homes and businesses. They're in a proprietary intellectual-property business with high gross margins and customers who pay right away. In contrast, Ventro, FreeMarkets and Internet Capital Group were all caught up in the recent business-to-business fad. Their uncertain business plans and unstable customer base gave them a half-life in the market not much longer than a
I will follow both lists over the next seven months and report back on the race's progress.
Donning a Value Hat
Do you find yourself rooting for the underdog? A friend who runs private money in New York alerted me to a new Web site that endeavors to form an exclusive online fraternity out of the best amateur value investors in the nation -- a cool counterpoint to the momentum-crazed daytrading sites that dominate the nation's bandwidth.
The refreshing premise at
ValueInvestorsClub.com is that there are few places online or off-line where people who enjoy doing old-fashioned valuation research on companies can share ideas. The club operators are picky about admittance: Applicants must submit a detailed explanation of their favorite current investment idea and will be judged by the quality of their thinking. After 250 people have been selected, the operators say they'll give each a password to a message board where terms like "price-to-earnings ratio," "long-term debt" and "free cash flow" aren't considered dirty words.
I masqueraded as a value investor back in mid-January and submitted
Caliber Learning Network
as my idea. The online education company was trading for around $2.75 when it caught my eye on a volume spike. I noticed it had gone straight down since its initial public offering in 1998 despite the backing of powerhouses
Sylvan Learning Systems
. It was incredibly cheap compared with its online peers. It also was gathering some price momentum and had nailed a nice series of deals with major universities like
. It looked like a cinch to at least take out its prior significant high of 5.
Caliber ultimately traded as high as $9.50 by late March, at which time I was temporarily (and ironically) named the president of the value club. It's since declined back to $4 and I believe the offer has been withdrawn. But I'm planning to hang out at the club anyway to balance out my momentum obsessions. Three ideas that club members are highlighting now: Software maker
, teen retailer
If forced to come up with a new value name myself, I might offer
, a maker of semiconductor and optoelectronic testing equipment, which is growing earnings at about a 30% annual pace but carries a dainty price-to-earnings multiple of just 25 -- about a fifth of its peers. The Cleveland-based company is carrying virtually no long-term debt and sports a rock-solid return on equity of about 36%. The stock is about 25% off its March high, but has recovered nicely from the recent crash -- helped in no small part by a report of record earnings on April 19. In a decent market, Keithley should have little trouble making up lost ground to make new highs this year.
My Response to Xcelera Article
Now a response to a column, "
Vik's Vapor Stock," published at our sister publication,
, one of my high-risk 100x10y picks. I don't mind taking potshots from other writers. Debate is where great ideas are tempered, broken and rebuilt. And I'm not a cheerleader for this company or any other. If its managers fail to execute on their plan, then I'll call them on it and advise readers to bail out. But I think this piece did a disservice to investors, and here's why:
The column suggests there is something nefarious about keeping a company domiciled offshore in a tax haven like the Cayman Islands. Not true. Taxes are an expense that managers must minimize. Any firm focused on overseas investments that can benefit from a offshore headquarters should do so. Three of the many large companies with headquarters offshore in Bermuda are
, insurance holding company
The column also suggests there is something nefarious about companies that don't file quarterly financial statements with the U.S.
Securities and Exchange Commission
. That would knock out virtually every foreign company listed on the Nasdaq and
New York Stock Exchange
-- including giants like
-- since none of them have to file statements with the SEC, either. And they don't.
The column complains that
Mirror Image Internet
, a key subsidiary of Xcelera.com, was virtually bankrupt and had "no material revenues, no income and no assets" at the time that Xcelera.com made its initial round of investments. Seems to me that this is what good managers are supposed to do: obtain undervalued or mismanaged assets and turn them around. The company had no revenue because its main attraction was intellectual property that had not yet been exploited. In that way it was little different from Wall Street darlings
, which nailed better than $5 billion market capitalizations upon going public, despite having less than $900,000 in trailing 12-month revenue each.
The column complains that the company had issued a flood of press releases to boost the stock and that only a couple of Web writers had bitten and written about the firm. But there had actually been a long series of articles in trade magazines about Mirror Image through 1999.
New York Times
columnist Floyd Norris wrote about the firm favorably the day after I first wrote about it last September. And
columnist and futurist George Gilder wrote favorably about it in his popular newsletter. And the number of press releases was actually scant compared to competitors like Akamai. In January, for instance, Xcelera.com issued five press releases, while Akamai issued 16.
The column suggests that
invested in the company merely to gain a new customer. But my sense from talking with managers at those two firms is that both see Mirror Image's technology as having the potential to transform the way we use the Web, and thus a strategic investment. A
analyst called Mirror Image's capacity to make all Web content local "a fundamental shift in the operating nature of the Internet."
And the column lastly finds it shocking that a company controlled by Xcelera.com insiders sold shares near the stock's peak in March. But these were shares the company
had bought in November, according to records. The net change in ownership by insiders is virtually unchanged in the past year, according to management, and no Mirror Image insiders have sold despite the historically unprecedented run-up.
Most curious about the
column is that it dealt cavalierly with the only thing that really matters: Is the company's technology useful, and is its business model plausible? It's true that significant revenues and earnings are at least six months away, and that Xcelera.com shares had advanced an unprecedented 90,000% to its peak in March merely on speculation that the firm would be successful in the future. (It later fell 70% from its peak in the recent crash before a partial recovery.) In that sense, Xcelera.com has behaved like a late-stage biotech stock whose value is measured better by psychologists than accountants. Yet it is also true that -- like a biotech stock -- its earnings could be remarkable if and when early investors' hypothesis about the value of its technology and the extreme leverage of its plan turn out to be accurate. For some fraction of investors, that's a risk worth taking with the aggressive portion of their portfolios.
I interviewed company Chairman Alex Vik while in New York on April 17, by the way. I didn't learn much more about the company's expansion plans than I've already written, but both as a journalist and as an investor in his company (since December -- three months after I first wrote about it in this column), I also wanted to size him up. That's hard to do even with our best friends and relatives. But for what it's worth, I came away thinking that Vik -- a champion collegiate golfer while at
in the '70s -- has a better-than-average chance of hitting a great wedge shot out of the dot-com sand trap. Being a patient soul, I'm willing to wait until this time next year to determine whether he's birdied or bogeyed.
I've developed respect for our new
columnists Laurel Kenner and Vic Niederhoffer. Their approach is more top-down and cosmic than mine, but I'm learning a lot from their perspective and encourage you to check them out. I asked this weekend for more support to their bullishness for May, and they noted that the Nasdaq had suffered only nine negative months in the past 36 -- and in each case the following month was up 10%. Our large-cap SuperModel stocks have staged an impressive comeback from their crash lows. At their nadir, our MVP Growth and Redwood Growth companies were all in the red; now those two models are up better than 25% for the year. The past two weeks have thus proven one thesis in spades: The best time to buy these names is into the teeth of a gigantic decline.
If you'd purchased our entire YearTrader list of 20 stocks into the close of April 14, you'd be up 32% for the past two weeks. Leaders are
-- up 112%, 68% and 62%, respectively.
We rebalanced our MonthTrader and HiMARQ portfolios at the close of April 28. New MonthTrader names are
Check Point Software
, Digital Lightwave and
Silicon Storage Technology
. New HiMARQ names are
At the time of publication, Jon Markman owned or controlled shares in the following equities named in this column or listed in the SuperModels portfolios: BroadVision, Cisco Systems, Digital Lightwave, Emulex, Kopin, Maxygen, Microsoft, Nokia, Nortel, Oracle, Qualcomm, SDL, Siebel Systems, Sun Microsystems, Superconductor Technologies and Xcelera.com. He welcomes your feedback at