Eleven Picks for Wi-Fi Greatness

As financial journalists have grown distrustful of fundamental analysis in recent months, they've turned to technical or price-driven views of the market.

Epic stories about companies and their supposedly heroic managers that dominated business news outlets in the 1990s have gone out the court house window. Instead, tortured statistical theories, ranging from January barometers to presidential election cycles, have come in through a crack in the cellblock door.

How dull. These approaches say more about reporters' emotional response to being duped by corporate leaders and brokerage analysts than about real needs of investors.

So, in the spirit of innovation and rejuvenation, I'd like to turn my back briefly on the numerical view of the markets that SuperModels has trademarked, and instead work together with readers to focus on the people and businesses that have survived the worst bear market in two generations.

Working together, surely we can come up with some major economic and technological trends to ride through 2003 and beyond. Last year, the winning idea would have been gold-mining companies, regional banks and bonds -- all of which were amply proposed by readers in cheery emails not long after 2002 had gotten under way.

Readers' Wi-Fi Picks

Let's start with the wireless local-area network market that I wrote about at length a month ago. I asked readers for suggestions on companies that were poised to take advantage of this technology's undeniable growth prospects. And I received more than 200 responses in return.

Tom Zachman of Dodge City, Kan., believes that wi-fi "is the starting point from where communications becomes unplugged. But the problem is that it follows the old model of centralized communications hubs that become sluggish with abundant use." Zachman believes the next evolution will be "mesh networks," in which every user is a "repeater" that links other users.

This is a great idea, as it improves the robustness of the data flow. Zachman proposed this vivid image: "Wi-fi follows our social patterns. Imagine a party where no two people talk directly, but the host is responsible for relaying every spoken word (packet). Now look at how people interact when a rumor is thrown into the scene. Now add a drunk who constantly interrupts the host, and you will understand how Internet servers interact with centralized wireless connectivity. It's a mess."

Zachman recommends that we take a look at Mesh Networks, a company funded in large part by ITT Industries ( ITT). It promotes peer-to-peer networking that enables every device on a network to act as both a router and repeater for all other devices in the network. The slogan, "You are the network," is a very big, cool concept. If it's properly commercialized, it could be a winner. Meanwhile, ITT is a reasonably priced defense electronics and industrial flow-control device maker with a 1% dividend yield; I'll put it on my watch list for 2003.

Reader Phil Herma recommends that we take a look at PC-Tel ( PCTI), as its June 2002 cyberPIXIE acquisition makes it one of the few pure software plays in the wi-fi area. PC-Tel's main set of products for wi-fi networks, branded Segue, provides assistance with roaming, one of the key barriers to wide acceptance of the technology. The concept is familiar to anyone who uses a mobile phone. If you had to use a different log-in for every cellular network you used as you traveled from city to city, you'd get frustrated pretty quickly.

The cellular carriers make use of roaming technology to hand your call off from network to network. That ease of use has to be recreated for wi-fi, only on a more localized basis, as wi-fi "hotspots" are much smaller than cellular phone networks. Without roaming capability, you might have to sign off and sign onto various wi-fi networks as you walked from block to block in town.

According to a PC-Tel spokesman, the Segue business is expected to provide a material level of revenue in the second half of 2003 as it transits from trials at the carriers into commercial usage. Even if that occurs, it will still be just a small part of PC-Tel's operation, which continues to be focused on conventional modem software. But the stock is not too expensive, selling for around three times sales and just a bit over book value.

Royce & Associates, the excellent small-cap fund manager, is the largest institutional holder of the shares, owning 11% of the company. Whitney George, portfolio manager at Royce, said his team was impressed with PC-Tel's intellectual property, strong balance sheet, double-digit revenue growth and history of profitability. "A strong balance sheet and low entry price will buy us time for industry conditions to turn around," he said. I'll put PC-Tel on my watch list, too.


Wi-Fi Watch List
Keep an eye on these in 2003
Symbol Company Jan. 6 Closing Price Market Cap Price/Sales
ISIL Intersil $15.95 $2.1 billion 3.6
BRCM Broadcom 18.71 5.1 billion 4.8
PCTI PC-Tel 7.12 141 million 3.5
MXIM Maxim Integrated Products 38.04 12 billion 11.4
RFMD RF Micro Devices 8.20 1.3 billion 3.4
INTC Intel 17.34 114 billion 4.2
HRS Harris 28.26 1.8 billion 0.99
ITT ITT Industries 60.05 5.5 billion 1.14
VZ Verizon 43.50 120 billion 1.8
DT Deutsche Telekom 14.18 59 billion 1.4
LVLT Level 3 4.98 2.1 billion 0.82
Source: MSN Money

Greg Lacefield and several others recommended a look at T-Mobile, the German cellular services giant that runs the hotspots in Starbucks nationwide. You have to give them credit for being early, and the T-Mobile operation, formerly known as VoiceStream in the U.S., does have an impressive cellular network footprint in the U.S. It's a division of the giant Deutsche Telekom ( DT), so there's not much point in taking an investment there just because you like its wi-fi business.

But on the other hand, Deutsche Telekom does offer a 2.5% yield, and it's not trading for much more than book value after the bear market has done its part to shred valuations. I'll add it to my watch list because European stocks have a good shot at decent performance this year anyway.

Several readers, including Jay Taft, recommended a look at WaveRider Communications ( WAVC) for its wide array of last-mile fixed wireless solutions that may benefit from an extension of wi-fi into rural communities. But I stay away from penny stocks and won't make an exception in this case.

Don't Forget Traditional Wi-Fi Players

Eric Glaas, a telecommunications industry consultant, said he thinks wi-fi will run into trouble over quality-of-service issues. But he believes that if there is a winner in the arena, it's likely to be the Baby Bells and other carriers that "figure out that consumers would be willing to pay a small incremental fee for broadband ubiquity."

Glaas cautions that wi-fi equipment manufacturers are likely to see a big increase in business, but will be plagued by competitive price pressures that will make earnings hard to generate consistently. The problem is that the technology is standards-based, so it's hard for any individual manufacturer to build a standout device that can win a disproportionate share of profits.

Reader Jerry LeVan suggested investors take a fresh look at Proxim ( PROX). This was a name attached to one of the original dot-com-era wireless plays. It was bought by competitor Western Multiplex, which snuggled into the name like a hermit crab, and then the combined company bought a large wi-fi products division from telecom giant Agere Systems ( AGR.A).

The combined company now manufacturers access points, wi-fi cards, residential gateways and other devices under the Orinoco brand name. Proxim is going for less than 90 cents, which runs afoul of my penny-stock rule. And small companies that merge generally go through long, hard transition periods.

Yet it does have more than $110 million in annual sales and is trading at less than half of book value, with a price-to-sales ratio of a mere 0.82. Debt is not out of control, and it has some major value players among its institutional holders. Speculators with patience might find this company worth a look, but I won't put it on my watch list. Execution and liquidity risks are too great.

Reader George Solis asked me to "cut down on the homey trivia on my columns and get to the point a little quicker." So after I note that my daughter Janie turned 8 last weekend, boosting the prospects for Barbie maker Mattel ( MAT), I must note that he recommended that wi-fi investors not overlook traditional wireless-chip leaders like RF Micro Devices ( RFMD), as it has a major stake in the local-area network business.

That's an apt point, and you could add Maxim Integrated Products ( MXIM), Broadcom ( BRCM), Intersil ( ISIL) and Texas Instruments ( TXN) to the list of the technology's key component makers. I'll add them all to our wi-fi watch list with a big asterisk next to Intersil as the intellectual-property leader.

Rob Duff, a reader who works for Wachovia Securities, said he believes wi-fi will become pervasive in time and offered a trickle-down methodology for building an investment in the area. He starts with broadband pipe providers who must be paid a fee for access to their Internet backbones, such as Comcast ( CMCSK), Verizon Communications ( VZ), AT&T ( T) and Level 3 Communications ( LVLT).

Next, he lists integrated semiconductor and software package providers Intel ( INTC), Microsoft ( MSFT) and Intersil. Then he adds makers of the new toys, which would be Flextronics ( FLEX) and even Dell Computer ( DELL).

Duff recommends that anyone wishing to take advantage of this "mega trend in the making" insist on a considerable margin of safety while investing here. This means buying a diversified basket of names, and buying each of them cheaply. Of this bunch, I will add Intel, Verizon and Level 3 to my watch list.

Reader Steve Goldstone calls our attention to Boingo Wireless, the first company to try to string together a nationwide network of wi-fi hotspots. It was started by EarthLink ( ELNK) founder and Chairman Sky Dayton, and is funded by both EarthLink and the venture capital arms of several other entities, including Sprint PCS Group ( PCS) and Evercore.

I can't imagine how Boingo will survive, but in all honesty, I never thought EarthLink -- my first Internet service provider back in 1996 -- would last either, and it has outpaced most of its competitors both as a company and as a stock.

And finally, before disconnecting, I'd like to offer a tip of the cap to old-line industrial electronics-systems maker Harris ( HRS), which is one of the granddaddies of wi-fi. A powerful developer of patented technology, it spun off Intersil a couple of years ago and is still a major player in the development of wireless and satellite solutions for the Pentagon, the oil industry and broadcasters.

Harris is trading near its five-year low in its price-to-earnings multiple, carries a price-to-book value of a low 1.5 and a price-to-sales value of less than 1. It also offers the prospect of double-digit growth and a 1.5% dividend yield. I'll add it to my wi-fi watch list as the final pick for more conservative investors, which by now should mean just about everyone.

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 supermodels@jonmark.com. At the time of publication, his fund held no positions in the stocks mentioned in this article, but positions can change at any time.

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