To OTC Journal Members:
 

Are Stocks Undervalued Right Now?

The Wall Street financial press and the analyst community spend most of their time arguing about stock valuations these days. The NASDAQ dropped another 200 points this week, leaving everybody wondering if there will ever be a bottom to this market.

However, a clue on valuations can be found in this week's news.

On December 18th the OTC Journal published a Trading Alert on Efficient Networks (NASDAQ: EFNT) at $14.56. We got 2 points out of the stock over a four day period.

We felt the stock was oversold and due for a rebound. Here were our thoughts at the time- this excerpt is taken directly out of the December 18th edition:

December 18th Excerpt on EFNT:

This past Wednesday EFNT closed at $12.375. It opened Thursday morning at $23 as a result of the announcement that Siemens, the German telecommunications behemoth, had tendered a cash buy out offer for 100% of the company's stock for $23.50.

We're not smart enough to know how to determine if stocks are undervalued. However, in the telecommunications arena, Siemens is. Siemens has been in business for decades and achieves billions in sales annually. Siemens was willing to pay twice the market price for EFNT.

Put aside all the noise from economists, analysts, and the financial press. Throw away the tired old argument about PE ratios being too high as compared to the 70's and 80's. Just look at what Siemens, a premier multi billion dollar telecommunications giant was willing to pay for EFNT. This tender offer is proof the stock was undervalued as are many other technology companies right now.
 

Today's Market- A Mirror Image of One Year Ago?

When you hold a piece of paper in the mirror the writing reads backwards. Today's market feels like the backwards mirror image of one year ago.

Last March investors were convinced stocks could never go anywhere but straight up. The NASDAQ was setting up for its assault on the 5000 level, and investors were making ridiculous money on the Dot-Com phenomenon just before the bubble burst.

Investor optimism was at an all time high, and the genius Wall Street analysts continue pumping out strong buy recommendations on Dot-Com companies their firms had brought pubic.

In April the bubble burst, and aside from a couple of relief rallies, it has been downhill ever since. Few would have believed the NASDAQ could be leaning on 2000 within a year if they had been asked last March.

Today's market psychology is the diametric opposite of one year ago. One year ago today we were five weeks away from the worst market in NASDAQ history. At the time investors believed stocks could only go up. Today investors believe stocks can only go down.

The Bear Market bubble is going to burst soon. It may be one month or six months. However, when it bursts, it will be the mirror image of April of 2000.

The three main factors dominate the economic landscape right now:

• Decreasing Interest Rates
• Decreasing Stock Prices
• Decreasing Corporate Growth Rates

The market is continuing to sell off due to the absence of buyers. However, short sellers are having trouble closing out large positions because there is so little stock for sale. This past week both Qualcomm (NASDAQ: QCOM) and Brocade (NASDAQ: BRCD) dropped over 10 points on slow down warnings. Each stock rebounded sharply from their sell offs as short sellers used the down drafts to lock in profits.

New leadership to the upside needs to be established, and that will set the table for the next Bull Market.
 

Network Computing Over the Internet

IBM invented the main frame in the 60's and large corporations had their employees working at terminals run from those main frames. The Desktop computer came out in the 70's, and now nearly everyone has one at work and at home.

Large corporations are now shifting their IT dollars back to Network Computing, and they are using the Internet as their network. The Internet is free, so companies are saving millions as they convert their internal networks to VPNs (Virtual Private Networks) using the free Internet backbone for their infrastructure.

Experts agree that even the desktop at home is going to eventually be replaced by the "Thin Client" environment. You will have a terminal at home with Internet access. All your files and software will be stored for you by a vendor, and the desktop with its memory and hard drive limitations will disappear.

Our next profile will be about a company that is developing software solutions which will allow different networks to interact flawlessly.

We have prepared a list of companies involved with the exploding Network Computing industry with some eye opening statistics for your review. If you believe that technology stocks are a bargain today might want to study this list. We looked at each company's quarterly result. Our tables show growth in sales and profits as compared to the same quarter in the previous year. We also included the 52 week high and current stock price. 

ARTG- Art Technology Group

BEAS- Bea Systems

ITWO- I2 Technologies

CMRC- Commerce One

VRTY- Verity, Inc.

BRCD- Brocade Communications

ECGI- Envoy Communications

Growth in both sales and profits for the above listed companies are exploding. Due to economic conditions, growth rates will probably slow for all of them. However, when you compare the current prices to the previous highs, one wonders where these stocks might trade in six months or a year.

The stock market is fraught with extreme swings. One year ago today we were at the end of an extreme swing to the upside. Now we are in an extreme swing to the downside. Eventually, everything comes out in the middle.

Short sellers have tremendous momentum right now, just as long investors had tremendous momentum one year ago. Like all bubbles, this one will also burst. The only question is when. 

There will be a short covering rally soon. Short sellers are having difficulty finding sellers to buy from at these levels. They realize there is limited upside at these levels.

The absence of buyers is moving us lower. We don't know when the bubble will burst back to the upside. However, we believe if you have the stomach for a few rough months, investors that accumulate growth stocks at these levels will be rewarded with the types of returns that can change your life style.

You might note we included Envoy Communications (NASDAQ: ECGI). After the Leagas Delaney acquisition is completed this company's growth rate will accelerate.

If you believe in our concept of accumulating good growth companies in a weak market, Envoy is at the perfect level. The stock dropped 1/2 point this past week on very little volume. There are no sellers left. Just very few buyers. Accumulate at these levels.

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All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein.

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