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Investors swing for the fences
So far, the year's best-performing stocks mark a decided shift back toward risk. Banks and insurers are out, tech and retail are in.
By Jon D. Markman
Regime change has quietly taken place on Wall Street in the first three months of the new year as an unexpectedly powerful battalion of small Internet, technology, biotech and retail stocks has shoved aside gold, regional bank and health insurance shares as ruling party.
Theres no telling whether the invasion of these mostly speculative, low-priced stocks will persist, but their move to power suggests a return of interest in risk among investors. You wont find more than one or two well-known names in the list of the top 30 stocks priced at $3 or more that have gained the most this year. This can be good or bad, depending on your point of view, as high levels of speculation are more characteristic of blow-off tops than of significant bottoms, according to researchers.
To understand more about the years best-performing stocks, I have divided them, as I have in the past, into two baseball-like leagues: the New York Stock Exchange and the Nasdaq. This is different than the normal set of partitions that investment consultants have created for stocks, which is size, sector, and growth vs. value. But it helps us see momentum stocks along the risk spectrum as the most-established, somewhat-established and least-established names. The NYSE stocks are cheaper and larger, for the most part, while the Nasdaq names are primarily story stocks with high hype-to-earnings ratios.
If youre bullish and think that the year is going to turn out great, then these are the stocks you should expect to see with 1,000% gains by around Christmastime. If youre bearish, then these are the ones youll want to start laying plans to short to zero. Ill offer my handicapping along the way, and will check back each quarter to see how the season is progressing.
| Nasdaq League | | Company Name | % Chg YTD | Market Cap $ Mm | Last Price | Price/Sales | Short Ratio | Industry | | Ask Jeeves (ASKJ, news, msgs) | 216.4 | 348 | $8.10 | 4.71 | 1.0 | Business software & services | | Align Technology (ALGN, news, msgs) | 137.3 | 378 | $6.55 | 5.04 | 16.0 | Medical appliances & equipment | | Rambus (RMBS, news, msgs) | 134.7 | 1,536 | $15.75 | 15.75 | 1.0 | Semiconductor - memory chips | | XM Satellite Radio Holdings (XMSR, news, msgs) | 124.5 | 611 | $6.04 | 30.20 | 9.0 | Broadcasting - radio | | Retek (RETK, news, msgs) | 110.7 | 304 | $5.73 | 1.59 | 5.0 | Internet software & services | | NII Holdings (NIHD, news, msgs) | 109.4 | 6,654 | $24.61 | 9.80 | 0.0 | Wireless communications | | Microsemi (MSCC, news, msgs) | 93.3 | 340 | $11.77 | 1.69 | 6.0 | Semiconductor- | | Sohu.com (SOHU, news, msgs) | 92.0 | 427 | $12.29 | 14.99 | 1.0 | Internet information providers | | aQuantive (AQNT, news, msgs) | 89.7 | 322 | $5.50 | 2.43 | 1.0 | Internet service providers | | Endo Pharmaceuticals (ENDP, news, msgs) | 85.1 | 1,876 | $14.25 | 4.70 | 4.0 | Drug manufacturers - other | | MGI Pharma (MOGN, news, msgs) | 82.8 | 335 | $13.25 | 11.94 | 12.0 | Drug manufacturers - other | | Netflix (NFLX, news, msgs) | 77.6 | 447 | $19.55 | 2.93 | 12.0 | Music & video stores | | BioMarin Pharmaceutical (BMRN, news, msgs) | 74.5 | 662 | $12.30 | 47.31 | 3.0 | Drug manufacturers - other | | Digene (DIGE, news, msgs) | 74.5 | 363 | $20.00 | 6.71 | 5.0 | Diagnostic substances | | Time Warner Telecom (TWTC, news, msgs) | 69.7 | 411 | $3.58 | 0.59 | 6.0 | Telecom services - domestic |
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| NYSE League | | Company Name | % Chg YTD | Market Cap $ MM | Last Price | Price/Sales Ratio | Short Ratio | Industry Name | | AirTran Holdings (AAI, news, msgs) | 86.4 | 531 | $7.27 | 0.71 | 8 | Regional airlines | | Tesoro Petroleum (TSO, news, msgs) | 84.3 | 538 | $8.33 | 0.08 | 5 | Oil & gas refining & marketing | | Williams Cos. (WMB, news, msgs) | 81.5 | 2,531 | $4.90 | 0.45 | 5 | Oil & gas pipelines | | Zarlink Semiconductor (ZL, news, msgs) | 71.7 | 493 | $3.88 | 2.55 | 14 | Processing systems & products | | American Tower (AMT, news, msgs) | 69.7 | 1,172 | $5.99 | 1.49 | 18 | Diversified communication | | Alcatel (ALA, news, msgs) | 66.7 | 9,358 | $7.40 | 0.54 | 7 | Communication equipment | | Cable and Wireless (CWP, news, msgs) | 63.1 | 3,017 | $3.80 | 0.42 | 6 | Telecom services - foreign | | MEMC Electronic Materials (WFR, news, msgs) | 62.9 | 2,413 | $12.33 | 3.51 | 7 | Semiconductor | | Biovail (BVF, news, msgs) | 59.0 | 6,567 | $42.00 | 8.33 | 5 | Drug delivery | | Fremont General (FMT, news, msgs) | 58.1 | 537 | $7.10 | 0.90 | 16 | Life insurance | | U.S. Industries (USI, news, msgs) | 57.0 | 308 | $4.13 | 0.26 | 1 | Lumber, wood production | | Crown Castle Intl. (CCI, news, msgs) | 56.3 | 1,310 | $5.86 | 1.45 | 3 | Diversified communication | | Alpharma (ALO, news, msgs) | 56.0 | 956 | $18.58 | 0.77 | 9 | Drug manufacturers - other | | AES Corp. (AES, news, msgs) | 55.6 | 2,653 | $4.70 | 0.31 | 19 | Electric utilities | | Abercrombie & Fitch (ANF, news, msgs) | 55.1 | 3,086 | $31.74 | 1.93 | 3 | Apparel stores |
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Nasdaq key players
Lets start with Ask Jeeves (ASKJ, news, msgs). The best-performing stock in our leagues so far in 2003, Ask Jeeves was up another 5% on Monday. And what does it do? A classic Internet play, it provides about 12 million people a month with answers to plain-English queries on the Web.
Revenues have steadily increased from much lower levels over the past year to $74 million over the past 12 months, but it still doesnt actually make money. Analysts expect that to change over the next year as they have been surprised to discover that rather than experiencing no growth at all in traffic over the past quarter, it squeaked out a 4% increase. Kaufman Bros., which rates the stock a "Hold," sees the potential for 33 cents a share in earnings in 2004, but its reasoning reads like a sound clip circa 1999: To the extent that the companys recently initiated advertising campaign generates higher-than-expected traffic growth, our estimates and valuation could prove to be conservative.
Ask Jeeves is a crypto-play on privately held Google -- a way to participate in the rejuvenated move toward search-based online advertising. Maybe Im just jealous, but its hard to imagine how this stand-alone also-ran will compete effectively with Yahoo! (YHOO, news, msgs), the MSN unit of Microsoft (MSFT, news, msgs) and Google itself. Insiders were dumping the stock like mad in February and April, getting rid of 530,000 shares at an average price of $6.70. At the price in the high $8s, rate this one "Asking for Trouble." (And, for the record, Microsoft is the parent of MSN Money.)
Next, we have Align Technology (ALGN, news, msgs), the second-best performer with a 119% jump in the first three months of 2003. The company developed and sells the Invisalign system for orthodontics. Instead of using metal mounts cemented on teeth that are joined by wires, it uses clear spacers to move teeth into alignment. Supermodels normally smiles on small companies that move up on patented advances in medical technology, but the price you pay is still important.
Revenues have steadily advanced since the company went public, to $75 million in the trailing 12 months, but net income continues to lag; the company lost $68 million in the past year. Deutsche Bank is bullish on the stock, announcing in a February report that cash is ample, both manufacturing and expenses are under control and that progress toward break-even results in the last quarter of this year is on track. Bear Stearns reports that 5,000 orthodontists submitted cases last quarter, up from 4,200 in the prior period and 2,400 in the year-ago period. General practice dentists have grown to 1,600 from 100 in the fourth quarter of 2002, compared to the year-ago quarter.
While the stock was undoubtedly interesting to early believers at the $1.30 level where it rested last November, or $3.50 where Bear Stearns and Deutsche made their bullish calls, its now trading at levels that seem to ensure disappointment if a souring economy dampens patients enthusiasm for cosmetic dentistry. Brace for a new opportunity to put your teeth into this one in the $3 area in the weeks or months to come, though short interest in the stock is high, potentially allowing it the chance to squeeze toward $8 before this move is over.
Leaders on NYSE's roster
On the NYSE team, perhaps the most interesting name is Zarlink Semiconductor (ZL, news, msgs). Formerly known as Mitel, the Canadian company makes chips and laser components used in networking gear made by companies such as Alcatel (ALA, news, msgs) and Cisco Systems (CSCO, news, msgs), as well as, in a medical division, chips for hearing aids and pacemakers. Revenue and income are flat to worsening, as you might expect, but the company has generated some excitement around a chipset oriented toward the digital satellite and cable set-top box market.
In late March, the company announced Fuzhou ZhuoYi Electronics, reportedly Chinas leading satellite TV equipment manufacturer, had selected one of its demodulation chips for a new satellite receiver set-top box. The set-top-box market has been waning in the United States, but analysts at Raymond James contend it is growing prodigiously in Europe and Asia and will help Zarlink meet goals of 9% sequential quarterly growth throughout 2003. The case seems a little farfetched to me, as competitors the size of STMicroelectronics (STM, news, msgs) are intent on dominating the space and will cut prices viciously to get there. In a frothy market environment, the heavily shorted shares Zarlink could double to the $8 area that it inhabited during the middle of last year, but there are likely to be many sellers standing in that line.
Ill keep an eye on all of the players in the league as the year presses on. If you would like to offer your thoughts about any, please send mail to supermodels@jonmark.com.
Fine Print
To learn more about Align Technologys innovative orthodontics products, visit its
Web site. ... Never underestimate the amount of money people will pay to improve their looks. To learn more about the future of Ask Jeeves, visit its Web site and try this query To learn more about its technology, visit this page. To learn more about Zarlink, visit its Web site. I thought this section of its site was remarkably refreshing. It lists obsolete products. With the Nasdaqs 15-day moving average over its 50-day moving average, portfolios of Flare-Out Growth could be considered in play, as well. Heres the screen and the top five stocks today are: Sina Corp. (SINA, news, msgs), Randgold and Exploration (RANGY, news, msgs), ANFI Inc. (ANFI, news, msgs), Daktronics (DAKT, news, msgs) and Select Comfort (SCSS, news, msgs).
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 was long BioMarin Pharmaceuticals (BMRN) and short Alcatel (ALA), but positions can change at any time.
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