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By Jon Markman Purchase Jon Markman's book "Swing Trading" at MSN Shopping. Related Resources See how StockScouter rates a stock View the all 50 top-rated stocks What were the best-performing industries? SuperModels Recent articles: • Cant figure out the global economy? Go local, 5/12/2004 • Prepare for worst, market seer warns, 5/5/2004 • A new hope for tech's old war horses, 4/28/2004 More... | SuperModels Mail call: Lottery picks (and pans) and a Belkin backlash SuperModels readers respond to GTechs recent bribery woes in Brazil and Michael Belkins bearish calls. Plus, Mr. P stops by -- and one reason things might soon be looking up. By Jon D. Markman Every couple of months, the author of the SuperModels column answers his mail as readers implore, Hey Modelman! Hey Modelman: A month ago, you wrote about two lottery services providers -- GTech Holdings Modelman: Lets start with GTech, which was punished the past week over two issues. On May 13, it reported that two of its top executives in Brazil face criminal bribery charges and that it faced scrutiny of the matter by the U.S. Securities and Exchange Commission. This is a big deal because the National Lottery of Brazil is the companys biggest single customer, accounting for about 10% of revenue. The Brazilian government, which is not unaccustomed to scandal, has sued to invalidate its contract with GTech and impose penalties of close to $650 million. As if that wasnt enough, GTech announced on May 12 that it had lost its online lottery contract in Puerto Rico. The contract amounted to only $20 million of the companys annual revenue, but illustrates the potential for governments to start avoiding GTech in the wake of its Brazilian brouhaha. Many U.S. analysts pooh-poohed the importance of the Brazil and Puerto Rico incidents. Marc Falcone, at Deutsche Bank, said the market had overreacted by slicing 20% off the companys value, as he said the Brazilian risk was well known and Puerto Rico was a minor account. Bulls noted that the company announced the launch of a $100 million stock buyback program on Friday, which would be a major commitment of about 3% of outstanding shares. However, analyst Paul Meeks, principal at Meeks & York in New Jersey, is less sanguine. He told clients a year ago that GTech, which he terms a cult stock, had been signing unprofitable contracts and warned that its Brazilian troubles would be much more serious than just the loss of a big chunk of its revenue. The Street didnt assess the impact of the bribe probe on other jurisdictions, he told me Friday. Puerto Rico felt it couldnt go with a company with an alleged bribe on its books -- and there are more problems like that to come. Meeks adds that another key problem at GTech is that the company so thoroughly dominates the worlds online lottery business, with 70% share, that it has virtually no room to grow. Using the companys own optimistic forward earnings guidance, and presupposing that it does not lose its Brazilian contract, Meeks comes up with a $42 price for the stock -- about $10 lower than its recent price.
The benefactor in all this, Meeks says, is likely to be Scientific Games. A longtime specialist in instant scratch-off games, its acquisition last year of the online lottery business of International Game Technology Hey Modelman: Whats Mr. P. thinking these days? You havent relayed his views in quite a while. Modelman: Mr. P, longtime readers will recall, is the veteran research director of a prominent hedge fund who has provided his views on market timing to SuperModels readers for the past four years. Among his great forecasts was an out-of-the-mainstream call in January 2001 for a 300-point drop in the Federal Funds rate; a forecast of a temporary end to the bear market in October 2002; a forecast for a huge war rally in March 2003; and a forecast of a dull trading-range market in 2004. He currently thinks the market is in one of the most complex phases hes ever encountered and recommends that private investors, to the extent they are capable, hold cash rather than stocks. Although a longtime Republican, he told me over the weekend that he is very disappointed by the political and military misjudgments of the Bush administration and thinks the key reason White House control appears to be disintegrating is that the president doesnt work at his freakin job. Mr. P believes that until the world regains its faith in a hardworking president with a firm hand on the countrys rudder, it will sell U.S. currency and financial assets. This is one of those rare times when theres very little to be gained by having a position, he said. I dont have a lot of confidence in the market. It is very dangerous. I dont care if I miss some upside. Volatility is rising and its time to be prepared for the unexpected. No matter how strong the economy is, the confederacy of dunces in Washington seems ready to do everything it can to screw things up. We are short stocks, bonds, the dollar, and long oil. His bravest forecast: That the Democrats will find a way to dump Kerry and draft Hillary Clinton for the 2004 presidential nomination. Hey Modelman: Thanks for the May 5 article entitled Prepare for worst, market seer warns. Michael Belkin is nuts. Now I know it's time to load up on tech.
His model suggests that gold and gold shares also got way too rich, and would counterintuitively decline in tandem with equities this time, providing no hiding place. Maybe hes wrong, but at least I have fulfilled my obligation as a columnist to provide an alternative point of view. By the way, he said he dropped out of high school and made a living flipping houses and playing music in Los Angeles before going to UC Berkeley in the mid-1980s to study finance and ultimately talking his way into his first job at Salomon Bros. Hey Modelman: The news has been so grim lately. Got any good news to report, any chance the recent downturn will reverse soon? Modelman: On Friday, Paul Desmond of Lowrys Reports said that persistent market weakness had caused his outfits so-called Selling Pressure Index to rise above his Buying Power Index, resulting in an intermediate-trend sell signal -- and ending the bullish outlook his service has held since March 17, 2003. However, he observes that none of the classic signs of a long-term top were in place before the recent decline occurred, and therefore believes that the current highly oversold market is ripe for a sharp reversal that will take stocks back to the top of their 2004 trading range. He said he believes the current correction has been much more extreme than bulls expected only because the 2003 rally progressed without a single 5% correction. Desmond typically recommends holding or buying the strongest stocks and culling out your weaker performers. The following table lists the StockScouter 10s with strongest recent relative strength. Here is a screen you can use to find them at any time.
Fine Print GTech contends, in part, that it was the victim of an extortion scheme -- not the perpetrator of bribery. Heres a story at LotteryPost.com that explains. . . . Learn more about Lowrys Reports at its Web site. Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdmmail@fastmail.fm. At the time of publication, Markman had a position in the following securities mentioned in this column: Scientific Games, GTech and Pilgrims Pride. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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