I promised to answer reader questions at least once a month. So, here we go:
Hey Modelman, you listed NII Holdings (NIHD) - Get Report as one of your Nasdaq All-Stars on April 10. It was a typical situation where a firm re-emerges from bankruptcy and nobody wants to own it. At the beginning of the year, it was just insanely cheap relative to comparable companies, but at $25 in April, there was no way I'd buy it. Now it's at $36! I wouldn't expect it to do too much more for the rest of the year, would you?
: NII Holdings, the quasi-independent Latin American arm of
( NXTL), is a great example of two key vectors in the market today. First, from a business standpoint, bankruptcy can help a troubled company eliminate its debts and lower its costs -- factors that give it a tremendous edge over competitors. Many of these are tigers when they return to public trading.
Second, from a market standpoint, traders today love "story stocks" with big upside earnings surprises and upgrades from well-regarded independent stock analysts. Many jump the first day after news and keep rising.
NII, which provides Nextel mobile phone service in Mexico, Brazil, Argentina and Peru, was already buzzing along on April 9, with a 109% year-to-date advance, when my screen for low-priced momentum stocks identified it as a stock with further potential. Three weeks later, the company announced blowout earnings -- exceeding analysts' expectations by a whopping 50 cents a share and recording $12 million in free cash flow in a quarter in which it was expected to report more than $20 million in cash
The stock moved up on that news, and then it climbed another $4.60 on the day Fulcrum Global Partners, one of the new-age stock research firms not affiliated with investment bankers, slapped a buy rating on the stock and a $44 12-month price target. The target price is based on the stock trading at 4.8 times 2004 earnings before interest, taxes, depreciation and amortization estimates, or 14.9 times its 2004 earnings per share estimates. That represents a 20% discount to comparable international wireless companies and a 25% discount to domestic wireless companies.
Fulcrum said that risks to the target price -- besides obvious obstacles like currency and global economic volatility -- include the potential for a dilutive secondary stock offering. Considering that insiders dumped 163,300 shares of the stock worth $6 million from May 19 to May 23, at prices from $31.50 to $36, it's probably time to look for a pullback in the shares. But with money flow still strong and momentum continuing, in a speculative environment, there appears to be room for further advancement in this high-wire act.
Redback's Up; What's Up?
What are your thoughts on Redback Networks( RBAK)? It went up about 50% in one day last week.
: Redback and all of the other little digital subscriber line and optical-equipment stocks such as
( AVNX) and
( NUFO) are in play again. In a story-stock environment, almost any group of badly beaten-down names will have its moment in the sun -- and sometimes more than a moment.
The recent swoosh in these stocks came after Avanex announced it would acquire the optical-components business of
( ALA) and
. That was good for about a 175% move in Avanex shares on May 13, and reignited traders' memories of 1999 and 2000, when these stocks regularly zoomed 10% to 30% in a day. At one point in 2000, priced at $273 per share, Avanex had a market capitalization higher than
; Redback traded as high as $180.
When sentiment changed, Avanex shares fell as low as 63 cents last October and were still trading around 85 cents in April; for Redback, the low was 26 cents in October and 65 cents in April. But perceptions change quickly these days, and a share of Avanex will now cost you $4.15, while a Redback share is still just $1.11. All of these stocks are wildly overvalued in relation to their business prospects at this level; but if history provides any lesson, it's that trading momentum has a life of its own.
Look at Satellite Radio's Supplier
In your column on Sirius Satellite Radio (SIRI) - Get Report and XM Satellite Radio( XMSR) ... you state you don't think there's any money to be made in the hardware for this new hot market. I respectfully disagree. May I suggest you take a look at the only supplier to service both camps, namely Audiovox (VOXXE) ? When it clears its Nasdaq reporting issues, I think you'll see ... its upside potential in this market.
: Good call. Sirius is up 53% since my column ran, while Audiovox is up 45%, including a 19% move on Friday alone. Audiovox, the distributor of inexpensive cellular handsets and car radios, has been a darling of many deep-value investors, such as Kahn Brothers in New York, for the past couple of years. Even after the past few days' run, the company still sports an extremely low price-to-book ratio of 0.69 and a price-to-sales ratio of 0.20 on annual sales in excess of $1.1 billion.
A key reason for the company's slump was concern over federal securities regulators' questions about its accounting methods. Last week, the company announced it would restate earnings for 2000 through 2002, and actually book $1 million more in profits than it had previously. With the
Securities and Exchange Commission
overhang out of the way, Audiovox shares can start to participate in the small-cap rally.
Besides its role as a fast-twitch deployer of cellular technology, Audiovox has become one of the leading deployers of low-cost radios for the satellite radio rollout. Thomas Kahn, whose firm is the largest institutional owner, told me Monday he believes the shares can double over the next three years, not just because of its role in the satellite radio food chain, but also because the cellular-phone replacement cycle is about to shift into high gear. Read on for a few more comments about satellite radio.
Let's Talk More About Satellite Radio
Nice article on the satellite radio stocks, but there were some errors and omissions. Only Sirius charges $12.95 per month. XM subscriptions are $9.99. Sirius is commercial-free on 60 music channels, but has commercials on its 40 news, talk and sports channels. XM is commercial-free on 36 of its 70 music channels, with limited commercials on the rest. But what you really missed is the programming.
: XM has achieved a faster adoption growth rate than cable TV, DVDs, CDs and all other electronic entertainment devices in history, because of the terrific content. Terrestrial radio stations try to reach the widest possible number of listeners to drive ratings. As such, the formats are bland and play the same music over and over. And they play up to 20 minutes of commercial per hour. A man named Lee Abrams, who is a programming legend, rules XM's programming.
I purchased Sirius last summer for my van and we have XM in my husband's car and in the house. I am not a super music fan and had doubts about the monthly cost. But after less than a month of listening, I would never own a car without satellite radio. The music streams have evolved and now have great mixes and smooth transitions. As a listener of both sat radio companies for over a year, I have to say that Sirius has better programming and no commercials on their music stations. There is a problem, however, that no one talks about: When we're driving, my husband "channel surfs!" As we all know, this is extremely annoying in the living room with cable TV, and now he can do it in the car, too!
: When was the last time you heard people so excited about a technology that they wanted to proselytize it? It reminds me of the early days of DVD or the Internet or, more recently, Wi-Fi networking. And coincidentally, there's one major semiconductor supplier that feeds key products to both Wi-Fi and satellite radio makers:
( AGR.A). It makes a second-generation chipset for Sirius that dynamically combines signals broadcast from ground antennas and three satellites to provide powerful reception capabilities. Because Agere also is a leading supplier of Wi-Fi components, it was careful to ensure that sat-radio devices didn't conflict with wireless data signals.
Agere was spun off from
( LU) in June 2001, and traded briefly in the $9 range before sinking to around 50 cents last October. The stock is up 325% from then, to around $2.40, which is a lot better than even the powerful 50% bounce in that period in the Philadelphia Semiconductor Index, or SOX.
Agere has struggled to obtain profitability as its revenue has weakened, but if you believe the economy is shaping up, its dominance in two growing technology trends should restore its balance. Agere is probably relatively undervalued, and could well get back to the $3.50 to $6 range in the next year from its current perch around $2.44.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
email@example.com. At the time of publication, his fund held no positions in any of the named securities, but positions can change at any time.