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To
OTC Journal Members:
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Market
Comment |
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With the exception of those astute
enough to sell in the first three months, Year 2000 has been a rough road
for stock market investors. This has clearly been the worst year in recent
memory. In fact, as of Friday's close, the NASDAQ is lower than
it was one year ago.
The NASDAQ closed at 3090.97 on Friday.
The NASDAQ closed at 3288.68 on November 18th, 1999; one year ago today.
This can only be described as a true Bear Market, particularly when
one considers the NASDAQ was over 5000 this past March.
Albert Einstein would have
enjoyed observing the laws of physics wreak havoc on the market. Clearly,
the precept "For Every Action There is an Equal But Opposite Reaction"
has
ruled the market in the past year.
The explosive run-up to the 5000
level in the 1st Quarter, led by the Internet Sector, has been greeted
with an equal but opposite reaction, taking us right back to where we started
from.
The September and October blood bath
was admittedly worse than we expected. We believe the sell-off was driven
primarily by tax selling. Many investors locked in substantial profits
in the 1st Quarter and were looking at equal but opposite paper losses
at the beginning of September. Those losses needed to be realized in order
to avoid major tax liabilities. Hence, selling was wide spread with no
discrimination.
In addition, mutual funds locked
in big profits during the 1st Quarter. Fund managers had to sell by the
end of October to avoid creating phantom taxable events for shareholders.
If history is any indication the
market should have started to improve by now. We expected the market to
be at least 3,500 by mid November, and back into the 4,000 range during
December. However, external events can often derail markets. The uncertainty
surrounding the Presidential election has clearly derailed the market rebound.
All Americans should realize whether it ends up being Gore or Bush, it's
going to be all right. Certain groups may perform better than others under
different administrations, but on the whole Wall Street likes both candidates.
Wall Street hates the uncertainty of not knowing which it will be.
Currently we only know one thing
about the NASDAQ: it does not like being below 3000. When it briefly
dropped below 3000 last week we were tempted to put out several trading
alerts on larger cap stocks. We were looking at Oracle (NASDAQ: ORCL)
near $24, but we thought the market might go lower, and we chickened out.
Sorry about that.
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The Internet
Sector |
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It was reported that 23 Internet
companies have closed their doors during the month of November leading
people to believe that Internet companies are dead. This is far from the
truth. The Internet is just beginning to revolutionize the way we lead
our day to day lives.
The most astute comment we have read
about the Internet recently is as follows: "As far as the Internet is concerned,
we have arrived at the End of the Beginning."
Amongst the group of people involved
with publishing the OTC Journal we use the Internet for many of
our day to day needs. One of us orders his groceries on the Internet. We
all make our travel arrangements on the Internet, do our banking, and pay
our bills. We communicate all day long using the Internet on the ICQ instant
messaging service. It has revolutionized the way we conduct our lives.
The investment community bet on the
wrong horse as far as the Internet business model is concerned. It was
widely believed that the Internet would become the Mecca of shopping bargains.
It didn't turn out that way.
There are few true shopping bargains
on the Internet. Case in point- one of our editors recently purchased a
book at Amazon for about $14. He wanted to purchase the same book as a
gift for someone else. The local Barnes & Noble sold the same book
to him for nearly $2 less net price.
It was widely believed Amazon
could lower prices because they did not need the high overhead of a "Bricks
and Mortar" location. Wall Street failed to realize the high costs associated
with providing an outstanding Web presentation and good ecommerce solutions.
The Internet has evolved into a convenience
model for shopping, not a pricing model. In reality, you simply don't save
much money on the Internet, and the performance of PriceLine.com (down
from $100 to $4) proves this point.
The sites with true bargains for
shoppers are successful. eBay is the clearest proof of this claim.
They have handled over 1 billion transactions this year, and they are profitable.
Charles Darwin would have
loved watching businesses on the Internet evolve. The Internet is living
proof of Darwin's Theory of Evolution. Only the strong survive and
go on to grow and mutate into even stronger species. The weak fail to evolve
and die.
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Envoy
Communications (NASDAQ: ECGI; TSE: ECG) |
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Envoy is one of the strong
that will survive, move on, prosper, and mutate into a much stronger company.
Envoy is very profitable and growing.
This environment of failing "Dot-Coms"
has led the market to believe advertising revenues will dry up. This is
true for ad revenues formerly spent by the failing Internets.
However, Envoy has been minimally
impacted by this evolution. Their largest customer is WalMart. Furthermore,
the company is about to mutate into a new species. It will be twice as
large as the prior entity, and have new characteristics which will allow
it to prosper in the new environment.
The recently announced acquisition
of Leagas Delaney will double the size of the company overnight.
More importantly, Leagas Delaney is viewed in the advertising industry
as one of the most creative agencies in the world, and area in which Envoy
needed improvement.
Leagas Delaney has offices in
London, San Francisco, Paris, Hamburg, and Rome. There client list includes
Adidas, Barclay's, The BBC, Coca Cola, Hyundai, Porshce, the United
Nations, Lycos, and GoodYear. The Agency has over 300 employees,
and $300 million in annual billings.
There was evidence this past week
that the market is starting to recognize the value and growth potential
of Envoy. While there was more negative publicity on advertising
revenue flow, Envoy started the week at $4.50 US, and ended the week
at $5 US far an 11% gain. Investors are starting to recognize the
value of this stock, and beginning to price in the value of the coming
acquisition.
Look for the long awaited Wall Street
recognition to start next year. The previously announced new relationship
with Merrill Lynch is beginning to evolve, and we expect Merrill
to get active with the company in 2001.
The next equal but opposite reaction
in the market is likely to be a rebound. The newly evolved Envoy
should ride the wave of the next bull market, which is inevitable.
As previously stated in past editions,
we still believe Envoy will be a $20 stock some day. Which just
don't know when or how it will get there.
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