To OTC Journal Members:
 

Why Should the Market Come Back in 2003?

Thankfully 2002 is over. We completed the third straight year of significant losses in all the major indexes. For the year 2002, the S&P 500 lost 23.4%, the Dow dropped 16.8%, and the Nasdaq toppled 31.5%.

Individual investors, discouraged by the erosion of the stock market wealth, have turned to their homes, both as a source of capital and a place to invest.

The worst Bear Market in history began in March of 2000. Skeptics see more of the same in the immediate future. Optimists see a wealth of opportunities.

One thing is for certain: By the time the main stream financial media and the newly cleansed brokerage firms of the 21st century tell you it is OK to put money back in the market, the first 25% will already have been made.

We believe it is highly likely the markets will post gains in 2003 barring any geopolitical catastrophes. Not as robust as the second half of the 90's, but nevertheless the markets will probably finish 2003 in positive territory.

Analysts spend their entire careers dissecting the hard numbers: PE ratios, growth rates, debt to equity, etc. However, successful investing in the stock market over the long term boils down to understanding one simple concept: Stocks go up when investors perceive the future is improving. Stocks go down when investors believe the future is worse. So why should we believe the future looks better? It's in the hard numbers.

The following table depicts earnings growth on the S&P 500 from calendar 2000 through the estimates for 2003:

As you can see, the S&P 500 experienced solid 16.2% growth in 2000, but toppled to a loss of 17.3% in 2001. 2002 saw a return to an anemic growth rate of 1.4%, but analysts see S&P earnings up 14% in 2003. Even if the estimates are adjusted down to 10% growth in 2003, the trend is still very positive and should start to be reflected in stock prices once the outcome of the Iraqi situation is determined.

For those who like shorter term numbers, the following table contains the quarter by quarter breakdown of S&P 500 earnings growth since Q1 of 2001:

As you can see, the low point for S&P 500 earnings growth was hit in the first quarter of 2002. Since then, earnings growth has improved. Despite post recession improving fundamentals, investors also had to deal with 911, followed closely by Enronitis, and now the specter of war with Iraq and increasing oil prices.

For senior citizens who saw their retirement wealth erode, the past three years has been a disaster. For others who have earning power in their future, the cleansing process of the three year bear market has been heaven sent. From today's reasonable valuations substantial wealth can be accumulated over the next ten to twenty years. 

This is the first edition of our sixth year publishing. We will continue to bring you ideas in the microcap arena. This area is highly risky and you must learn to accept losses, but can be very rewarding when you catch the right company at the right time. We hope to be a source of profitable investing ideas in this new year.
 

Irvine Sensors (NASDAQ: IRSN)- Misleading Dow Jones New Story Frightens Investors

Shortly after launching our initial coverage and subsequently reporting the best quarter in the company's history, a misleading Dow Jones news story precipitated a sell off in the stock.

On Friday, December 27th, the Dow Jones published a five sentence article headlined "Irvine Sensors Has Doubt About Its Going Concern Ability". This headline misled investors into believing the company is in financial trouble, and precipitated a sell off in the stock as you can easily see in the chart.

For some reason Dow Jones selected one sentence out of a 300 page SEC filing to highlight. Dow Jones failed to mention that in fiscal 2002, Irvine Sensor's revenues came in at $15.3 million, up from $10.7 million the previous year. Losses were also reduced by 81% over the previous year. Dow Jones also failed to mention the company has raised additional capital since the end of fiscal 2002, strengthening their balance sheet.

Also overlooked in the brief article was the fact that revenues grew 70% from Q2 to Q3, and another 70% from Q3 to Q4. 

Ultimately, Irvine Sensors may prove to be an unprofitable idea, but it won't be because the company goes out of business. It has been publicly traded for 20 years, and continues to survive.

Owning Irvine Sensors is a bet on newly surfacing demand for the military and homeland security applications of their technology. For the first time in their 20 year history, the bulk of their revenues are coming directly from the US Military. In fact, a full 66% of fiscal 2002 revenues came from the US Government.

Shareholders have the opportunity to make substantial returns if current technology trials turn into major military contracts. The bulk of their revenues are coming from the JigSaw technology, currently being tested by Defense Advanced Research Projects Agency (DARPA).

Major contracts could come in the first quarter of 2003, or might never come. However, when one considers the enormous increases in defense and homeland security spending, and Irvine Sensor's 70% revenue growth rate over the past two quarters, we like the odds.

As you can see from the chart, the stock pulled to its support line and rebounded. If you owned it and sold the stock, or didn't participate last month, now would be a good time to review our original profile and subsequent coverage of year end numbers. Click here to get to the archive section of our web site on Irvine Sensors.

We still believe this company is entitled to trade at at least one times annual sales, which gives up a price target of $3.80. If the company turns profitable or lands substantial military contracts, our estimate could go up. Conversely, if there are no positive developments by the end of the 1st calendar quarter, our expectations will go down.

SwingWire.com also has a lucrative incentive model for experienced investors and traders who consistently outperform the market. Share market ideas with other like-minded investors, establish a proven track record, provide insightful commentary, attract followers and ultimately become one of the Internet's highest paid and most sought after CyberAnalysts! 

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Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://www.otcjournal.com/disclaimer.html for our full profiles and http://www.otcjournal.com/trading-alerts/disclaimer.html for Trading Alerts.

MarketByte LLC has been pledged a fee of $25,000 by Irvine Sensors for coverage through December 31, 2003. As part of the agreement, one of the prinicipals of MarketByte LLC has been pledged 75,000 options, with an exercise price equal to the closing price of Irvine Sensor's stock on March 4, 2003, contingent upon stockholder approval of the option plan to be voted on at the annual meeting of March 4, 2003.

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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We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.govand/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm. Disclaimer ID:xG1jf4ll Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.