Stockscom Report for Sunday April 2, 2000

Many apologies for the delay since the previous Report. For us Y2K arrived late and with a vengeance as we experienced our most serious and widespread computer crash ever. Some subscribers availed themselves of the telephone for consultation, which we were pleased to provide, and particularly so given the turbulence of markets during March.

In hindsight it looks as if we may have been right to have identified an important cyclical low at the end of February but we did not expect quite so much buffeting as a result of identifying some stocks to buy back.

Again in hindsight, we made at least a near-term miscalculation in timing our re-entry, but we regard it as important to emphasize the word "near-term". Our definition of a bull market is one that defines successively higher highs and higher lows on the monthly chart. A stock on the way to advancing by two, three or more times can easily set back by a third or more, sometimes much more, without violating the reasonable expectation of a much higher stock price in due course. In practical terms, you can buy into an apparent new turn only to see this apparent new surge fade out. The fading in price, however, may only be temporary, as price runs ahead of buying power. Any return toward the previous major identifiable low may provide a new buying opportunity when you see the price starting to stabilize and to deliver new near-term buy signals.

During March there appeared to be a major shift away from high tech stocks and into so-called value stocks, or Old Economy stocks. The big question is whether that shift is truly the start of a major and long-lasting market rotation, or whether the apparent shift was an aberration.

Our strongly held view is that the recently apparent shift in market fashion will prove temporary. Yes, there is wonderful value in some bricks and mortar companies like Sears and Ford, and among the airlines and the homebuilders. However, the real action will mostly remain in the general field of high tech, notably the internet and electronics generally, as well as medical technology generally and specifically biotech.

Many, many people think they are lessening risk by investing in old-line stocks that seem to offer solid value. The reality in our view is that Old Economy stocks apparently offering great value are just as likely to fall hard as any reputable high tech stock, as we saw with Proctor and Gamble. Within a few short weeks the stock fell from $117 to $55. We think this stock is still expensive and that its prospects for achieving a new high are extremely remote. By contrast, we see many stocks like Yahoo and Sony that seem to have fallen hard but which we expect to go out to new highs within the foreseeable future. Once out to new highs, they could keep on going for a double or triple from their current price level.

In sum, our strongly held view that it is better to stay in the general area where the action is, but with two important provisos. The first is that we should keep some cash on hand and not be overweighted in stocks, and certainly that we should not buy stocks on margin. The second proviso is that we want to own stocks in companies that are making money, or which have a reasonable prospect of making money. In current market conditions, we have found to our cost that we should perhaps be even more mindful than we previously thought necessary about risk.

In considering where market action is, there is always a small number of stocks coming to life that are in the early stages of taking flight. In current market conditions, when so many stocks are so expensive and in addition are technically overextended, it is hard to find these stocks, but we have a few new ones to recommend in the current Report.

There is a popular view that the entire internet universe is the greatest market bubble of all time. To a very limited extent we share that view, so let's explain what the limit is. In our view there are many, many internet stocks trading at idiotic price levels, and also in many cases representing companies unlikely even to stay in business. There are even some quite prominent stocks in that category and among the most prominent, we have grave doubts about amazon.

Then there is a universe of stocks that have a solid business, but where it seems exceptionally difficult to justify current price levels. Among these stocks we include Cisco, Exodus and some other apparent must-own stocks. By and large, when we have thought these stocks unsustainably high, they have simply gone on to ever higher levels. Sometimes we have gotten the worst of all worlds by getting out near an intermediate low just ahead of the next upward surge.

In times like these when stocks are so volatile, it is worth considering what one might reasonably expect from stocks. Over the long term there have been very few investors who have consistently achieved much better than an annual return of 30 or 40 percent. That is about what George Soros has achieved over the long term. It is worth noting, therefore, the experience of recent years as it relates to specific stocks. Find just one or two that go up by five or ten times and they make up for quite a lot of stocks that do little or nothing.

Sentiment

There are two major conflicts with respect to supply and demand. On the one hand, there is an almost inexhaustible supply of new internet stocks coming to market (IPOs). This could increase the supply of stocks relative to demand. If the appetite for them starts to wane, there may be fewer IPOs, but there may be more selling by insiders of stocks that came to the market within the past year. These stocks mostly represent the small and speculative part of the market bubble.

The other side of the coin is that with corporate profits burgeoning, many companies are buying back their own stock. The result is to reduce the supply of quality stocks while putting more purchasing power back into the market. Increasingly this money is likely to look for action in high tech companies likely to stay the course, stocks like Corning and Qualcomm, returning this week to our recommended list.

Interest Rates

The US economy continues red hot, with no signs whatever of slowing. Therefore, it is unlikely that short term rates will be coming down any time soon. On the other hand, the outlook for long-term interest rates is quite good. It is almost certain that the worst is over from oil prices. They are unlikely to decline far but the price is unlikely to go much over $30. Bonds have $25 oil built into their current pricing.

Bonds are, of course, vulnerable to inflation. However hot the US economy, inflationary forces are evident only in selected areas. They are prevalent in certain areas of the real estate market. They are also evident in certain areas of pay and benefits. However, those pressures are largely counterbalanced by lack of pricing power. The locomotive of growth is productivity resulting from technological innovation. As when the railroads lowered the cost of freight by 95 percent in the last century, the lowering of costs from high tech are huge.

New Recommendations

American Power Conversion(APCC) $42.88. We said in the last Report that we were looking at this stock and we should in hindsight have come out with a firm buy recommendation. This company is the world leader in backup power supplies for keeping the internet running. The stock has only recently broken out above its high in February last year. It looks like a potential double from here.

Beckman Coulter(BEC) $64.19. This high tech stock has just broken out from a consolidation that began with a setback from its high in August 1998. Great company and potentially a double from here.

Novell(NOVL) $28.63. This company has been a tough stock to own for a long time. We previously made money in it but it was a long and hard pull. It appears to have a proprietary Internet niche that is immensely profitable. The stock broke out in December with a huge surge. Then it settled back and now appears to have stabilized. The reward to risk here is very favorable indeed.

Qualcomm(QCOM) $149.31. This is one of the Microsofts or Ciscos of broadband technology, to mix some metaphors. The stock got much too far ahead of itself at the beginning of January. Now it has a beautiful looking saucer bottom, suggesting that it may be preparing for another leg up.

Yahoo!(YHOO) $171.38. One of our favorite net stocks, that we owned before. In our view this is the market leader in search engines, with management prowess that looks to be securing its leading role internationally as well as in North America.

List of Current Stock Recommendations:

Note that there are several of our current recommendations which might seem to warrant selling on account of the fact that they have fallen hard. Our experience over the past year has been that it generally pays to give a great stock more room to move than many people suggest. We particularly believe that Idec and Sony are outstanding buys on what we believe to have been temporary weakness. Several biotech stocks have come under extreme pressure. Nevertheless, we don't see them going out of business. What we do see is a dynamic sector that has come through a severe thunderstorm, but which is very unlikely to be ending its bull market, let alone starting a bear market.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is B, meaning the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. B+ and B++ indicate stocks for which there is a technical case to buy now, with plusses adding weight according to how many there are, up to a maximum of five. Stocks rated H are ones to hold, awaiting confirmation to buy more or to sell. SELL, of course, means what it says. It seldom pays to override this designation.

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

First bought Entry Last

3/2/00 Applied Micro Circuits(AMCC) 255.44 150.06 B++
3/2/00 Atmel Corp(ATML) 50.31 51.63 B++
3/2/00 Biomira(BIOM) 17.75 10.19 H
3/2/00 Biovail(BVF) 67.56 44.25 H
3/2/00 Broadcom(BRCM) 208.50 242.88 B++
3/2/00 Broadvision(BVSN) 85.75 44.88 H
3/2/00 Ciena(CIEN) 181.50 126.13 B+
3/2/00 Cognos (COGN) 67.09 62.56 B++
3/2/00 Corning(GLW) 200.00 194.00 B+
3/2/00 Fusion Medical(FSON) 17.75 19.50 B++
3/2/00 Genzyme Molecular(GZMO) 29.00 15.13 H
3/2/00 Idec Pharma(IDPH) 149.88 98.25 B++
3/2/00 LSI Logic(LSI) 69.25 72.63 B+
3/2/00 QLT Therapeutics(QLTI) 73.25 55.25 H
3/2/00 Rogers Group(RG) 33.75 29.81 B
3/2/00 Royal Phillips(PHG) 200.38 171.31 B
3/2/00 Seagate(SEG) 51.25 62.50 H
3/2/00 Sony(SNE) 303.00 241.31 H
3/2/00 TD Waterhouse(TWE) 19.88 25.88 B++

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