REVIEW AND PERSPECTIVE: Taipan's 1997 Stock Outlook
Looming profits in the Holy Land
Elron Electronics
Industries (ELRNF-NASDAQ) is a pure value play on a diversified group of
high-tech companies. If "high tech" and "value" sound
strange together, it's because investors haven't caught on to the hidden
values in Israeli holding companies. Elron is a US$243 million company with
over a dozen affiliates. In 1995, the combined revenue of Elron's affiliates
totaled US$1.2 billion.
I expect Elron
to perform well in the first half of 1997. Elron just completed the strategic
breakup of its biggest holding, Elbit.
Elbit just broke
up into Elbit Medical Imaging (EMITF-NASDAQ), Elbit Systems (ESLTF-NASDAQ),
and Elbit (ELBTF-NASDAQ), corresponding to Elbit's old medical imaging,
defense, and communication businesses. If you owned one share of Elbit,
you would now hold one share of EMITF, one share of ESLTF, and one share
of ELBTF.
When the three
divisions were mixed together, it was difficult for investors to value the
company as a whole. Defense companies generally trade at lower price/earnings
multiples than med-tech supply companies, depressing Elbit's share price.
Now that they're chopped into separate packages, valuations should improve
- netting a windfall for Elron shareholders.
Delicious parts
Elbit Medical
Imaging (EMITF-NASDAQ) is the most deeply discounted Elbit fragment.
EMITF is a world
leader in medical imaging technology. The company has a market cap of only
US$95 million per share - even though estimated 1996 revenues stand at US$515
million. That's US$24 in sales per share - and the stock's only trading
at US$4.25! Most med-tech supply companies trade at one times sales and
up. Even after applying a deep 50% discount to the cheapest comparable stock,
you still get a target of US$11 for EMITF.
Elbit Systems
(ESLTF-NASDAQ), the defense fragment, is also dirt cheap. ESLTF specializes
in upgrading existing weapons platforms with new electronic systems. ESLTF
should earn around US$0.72 in 1996.
Applying a conservative
12 price/earnings multiple, you get US$8.64 - a 23% gain from current levels.
When you add
EMITF, ESLTF, ELBTF at current market prices, you get US$13, the same level
Elbit was trading at prior to the breakup. But when you factor in more realistic
valuation levels for EMITF and ESLTF, you get US$21.89. Elron's stake in
the three companies will be worth US$186 million, or US$9.20 per share.
When you stack
up Elron's other publicly traded holdings at current market prices, you
get a net asset value (NAV) of US$12.76 (that's the actual value of the
Elron's holding per share). Add in Elron's private holdings at book value,
and you get a NAV of US$13.47.
Elron has historically
averaged a 10% discount to NAV. That gives you a short-term target of US$12.125
- a 21% gain from your entry price!
Special delivery from Chip Express
When I read about
Chip Express for the first time, I immediately booked a flight to San Francisco.
This Santa Clara, California-based Elron affiliate holds the patents for
a revolutionary process to produce custom-designed chips - in 24 hours.
You can get the a prototype of any chip you need - when you need it. And
by the time conventional manufacturers are producing prototypes, Chip Express
can crank out the real thing in high volume.
Before Chip Express,
you were either stuck with off-the-shelf gate arrays which restricted your
designs, or custom-built chips that are expensive - and took weeks to produce.
Instead of fabricating a wafer to meet a specific design, Chip Express pre-fabricates
a generic base wafer and destroys the unnecessary connections with a laser
cutter, creating a high-quality, low-cost prototype.
By opening up
the door to low-volume wafer production, Chip Express is in a position to
capture the entire "middle" semiconductor market - estimated at
US$5 billion. The fast turn-around time allows customers to create products
with short life cycles. Chip Express's clients include Sun Microsystems,
Cisco Systems, AT&T, and IBM. And Chip Express is the only company to
provide a gate-array solution to military customers who usually require
low-volume orders. The company's military clientele includes Rockwell, Lockheed,
and Allied Signal.
This will in
turn create new markets as semiconductors are incorporated into an exploding
number of electronic applications. Semiconductor content in electronics
has grown from 3% in 1975 to over 17% in 1995 - leaving all the growth for
the future.
If you value
Chip Express at 5.5 times 1995 sales, you get US$100 million, leaving Elron's
43.5% stake valued at US$44.5 million. Elron has a large tax-loss carryforward
that should offset any gains from the sale of Chip Express.
The flotation
of Chip Express within one or two months should add US$2 to NAV.
I expect Elron's
NAV to rise to US$14.125. Add in conservative estimates for Elron's next
flotation, Netvision, and you get an estimated NAV of US$16.00. But this
analysis ignores the expected 10% growth in NAV across the board at the
fiscal year end. Elron's NAV should peak out at US$17.60 in 1997. Applying
a 10% discount, you get a target of US$15.84.
Buy Elron
(ELRNF-NASDAQ) with a US$16 target for early 1997.
For more information,
contact Uzia Galil, C.E.O., c/o Elron Electronic Industries, P.O. Box 1573
Haifa 31015 Israel, tel. (212)935-3110.
Pohang your head!
Pohang Iron and
Steel, or POSCO (PKX-NYSE), is the one of the world's most undervalued blue
chips. POSCO is the world's largest steel producer. The ordinaries are trading
at just eight times earnings, which is as low as you can get.
The ADRs in New
York are trading at a 17% discount to book value. Considering POSCO is the
most efficient steel producer in the world, this deep discount is not sustainable.
Ton for ton, POSCO can squeeze more profits out of steel than any other
major producer.
A collapse of
both the international steel market and the Korean stock market undercut
the stock from a high of US$43 to a low of US$18.75. But I expect both factors
to reverse. Steel is set up for a major rebound. Steel insiders are aggressively
buying across the board in the United States, a sign that company insiders
are bullish on their own stocks. And loose global monetary conditions will
eventually trigger an acceleration of economic growth. Demand for housing,
automobiles, and ships will take off. And with it, demand for steel!
A 5% improvement
in steel prices would add 15% to POSCO's earnings. By mid-1997, I expect
steel prices to increase by 10%. That's a 30% gain in earnings!
The Korean stock
market will also recover. The brutal bear market that knocked 40% out of
Seoul is about to reverse. The market is getting ridiculously cheap. All
news of an economic slowdown has been discounted. The central bank will
aggressively reduce rates, sending the entire market around 50% higher from
current levels.
POSCO will outperform
on the way up. The company's exposure to construction, engineering, shipbuilding,
appliances, and automobiles make it a mirror image of the Korean economy.
While a ballooning trade deficit sent the economy screeching to a halt,
exports to Japan and Southeast Asia will start to pick up. And declining
rates will trigger an economic recovery as debt levels are eased, equity
valuations are marked higher, and capital investment freed up.
Keeping a level head and a fat wallet
In October 1996,
the South Korean government issued its stimulative fiscal package - including
a surprise 8% reduction in the price of hot rolled steel coils. But POSCO
beat them to the punch, and cut the local export price of hot rolled coil
and wire rod by 10% in response to the "National Competitiveness Campaign."
Taipan was flooded
with calls and faxes about the news. Investors panicked as the ADR started
slipping. But if you actually did the math, the impact on revenue is negligible.
Local exports
only account for 15% of sales by volume. And only 18% of hot rolled coils
and 19% of wire rods are sold as local exports. Since the 10% cut will affect
only the fourth quarter, you get a loss of approximately W3.7 billion (US$4.4
million). Since total 1996 revenue is estimated at W8,625 billion (US$9.9
billion), the price reduction will have no noticeable impact on 1996 earnings.
As for 1997 earnings,
steel prices will head higher as the Korean economy comes roaring back.
If anything, lower prices will stimulate demand.
Taipan maintains
POSCO ADR (PKX-NYSE) as a buy under US$23.
For more information,
contact Seon-Ah Park, c/o Pohang Iron and Steel, POSCO Center, 892, Daechi-4
dong, Kangnam-ku, Seoul, 135-777, Korea, tel. (82-2) 3457-0939, fax (82-2)
558-3462.
From Russia, with love
If there's one
thing I find more attractive than Russian women, it's Russian stocks. That's
why I'm planning another research trip to Russia.
Up 120% in dollar
terms, the Russian market blew away nearly every other market in the world
in 1996 ... The Dow, the Asian tigers, and Latin America were left in the
dust ... But Russian stocks are still dirt cheap!
You can buy a
barrel of oil for pennies on the dollar. Growth stocks with 100% earnings
gains trade at price/earnings multiples in the single digits. Most stocks
trade at deep discounts to book value. Russia is probably the only market
in the world in which companies have understated earnings to lower tax liabilities.
Because valuations
are so cheap, there's only one direction for stocks to go: up. In 1996,
foreign investors drove equity prices higher. Now that Yeltsin is back in
office, foreign investors will pour even more cash into the market. Taipan's
sources indicate that the IMF loan will be released after the Duma announces
its new budget (it was delayed due to poor tax collection).
Russia's Eurobond
offering overwhelmed even the most optimistic projections. The Russians
managed to sell US$1 billion worth of debt at a very small premium to U.S.
Treasuries - and $100 million worth of demand was left unfulfilled. It's
a sign of foreign investor confidence in Russian financial markets.
What's holding
back the next wave of foreign investors is the limited number of ADRs. Many
mutual funds have restrictions on buying securities in foreign markets.
Only a handful of companies have issued ADRs. But that's about to change.
At least five
blue chips are planning to issue ADRs. Institutional brokers in New York
tell me that selling the ADRs to fund managers is easier than selling cigarettes
to minors. The companies that issue ADRs will go through the roof - bringing
the entire market with them.
But the big bang
will come from domestic investors. Russians got burnt by con artists during
the voucher privatization program in 1992. Pyramid schemes like MMM managed
to rip hundreds of millions of dollars out of ordinary Russians. Since then,
the public has avoided stocks like the plague.
Our sources tell
us that this is about to change.
Russian brokerage
firms are putting together mutual funds for the first time. These mutual
funds are expecting to raise billions of dollars from Russians. At the same
time, bond yields keep declining. Interest rates are no longer competitive
with stocks. Money is already flowing from the GKO market (government debt)
to stocks. Taipan forecasts that inflation will decline to 17% annually
in 1997. A torrent of cash pent up in GKOs will flood the stock market.
We believe that
most calculations about the money Russians will pump into the market are
naively exaggerated. (Consider that stock market investment even in Western
Europe is not half as popular as in the United States or Hong Kong!) But
there are no two ways about it. A flood of dollars will be chasing a limited
number of stocks - unfettering an explosive bull market that will blow away
the most optimistic forecasts... And all the new cash will pour into the
most liquid stocks. You can count the blue chips on your fingers.
As one of the
most shareholder-conscious companies in Russia, Chernogorneft will continue
to lead the market higher. High world oil prices improved Chernogorneft's
earnings in 1996. And I expect oil to move higher in early 1997. While the
move would surprise the majority of analysts, current levels are higher
than anyone was talking about a year ago. Another US$5 rally in world oil
prices would almost double Chernogorneft's pre-tax earnings.
But even if oil
slips, the rampant bull run of the Russian bear will carry Chernogorneft
sharply higher.
Buy Chernogorneft
ADR (CHRHY-Pink Sheets) under US$10 with a US$22 target for 1997, based
on the present value of proven and probable reserves.
For more information,
contact Boris Korolyov, Secretary of the Board of Directors, c/o Chernogorneft,
67 Industrialnaya str., Nizhnevartovsk, Tyumen Region, 626440, Russia, tel.
(7-3466) 274893, fax (7-3455) 238804.
Sell now and buy back at a cheaper price!
We have been
telling you since 1992 that ATC Group Services (ATCS-NASDAQ) - the former
ATCE - is a great company. Its fundamental worth continues to grow, while
it looks cheap compared to other growth companies.
So why did Taipan
recommend bailing out in our Weekly Hotline?
Taipan looks
for undervalued growth stocks before they are discovered by institutions.
Our investment philosophy is to "buy on rumor and sell on fact."
We let institutional investors take shares off our hands at a profit. Because
once institutions get their hands on a small company, there's no guarantee
that the interests of minority shareholders will be looked after.
Taipan has made
money on ATC since 1992, when the stock was trading under US$3. The company
has grown rapidly since, sending ATCS as high as US$18.
But ever since
Rodman & Redshaw underwrote a secondary offering of 2.8 million shares
at $11, ATCS has been in a liquidity trap. With a three million share float,
there's enough supply overhanging the market to potentially devastate the
stock.
This doesn't
mean ATCS won't perform well over the next several quarters. But earnings
forecasts are totally irrelevant to the performance of ATCS. The only significant
issue to the direction of the share price is the psychology of a handful
of institutional investors. They will continue to use good news as an excuse
to sell, cutting off any rally.
I was surprised
by the poor performance of ATC during one of the most powerful bull markets
in history. While some people were paying price/earnings multiples of 1000
and up for high-tech scams, no one would cough up a price/earnings multiple
in the teens for a real environmental company. In fact, ATC slipped 66%
from its highs... That's because no one is following the stock besides some
institutions that are looking to unload their inventory.
And they have
begun to unload shares on the way down. Watching the ticker tape, I saw
a massive block of ATCS sold under the market - through the third market
(traders use the third market to try to hide their tracks). The next day,
ATCS broke support at US$10.
Unfortunately,
this is only the beginning. I don't know how low ATCS will drop before the
selling is exhausted. But I don't recommend sitting around and waiting to
find out.
Considering the
precarious position of the entire market, ATCS is the last stock you want
to be left sitting on. If you got in at lower levels, and are willing to
wait out a potential bloodbath, there is nothing wrong with holding onto
your shares. But the real bargains will come later, once the sellers have
completely capitulated.
Marked from the
beginning of 1996, ATCS has triggered our recommended standard 20% stop
loss on every position. Of course, some of you still are sitting on 190%
profit, having accumulated the stock at US$2.75 and up.
Sell ATCS-NASDAQ
over US$8! Look for a chance to buy ATCS back under US$5!
For more information,
contact Morry Rubin, CEO, c/o ATC Group Services, 104 E. 25th St., 10th
Floor, New York, NY 10010, USA, tel. (212)353-8280, fax (212)353-8306.
Squeezing profits out of the heart of darkness
1997 will be
a great year for South African bonds - and a terrible year for South African
stocks. You can blame it all on the currency market.
Even though South
Africa has come a long way in bringing down inflation, its CPI is starting
to tick up again. At the same time, South Africa's balance of payments is
weak because of its growing trade deficit. That's a surefire cocktail for
a weaker currency. Only the central bank doesn't have enough reserves to
prop up the rand.
To currency speculators,
that makes shorting the rand a one-way bet. South Africa can't support the
rand without hiking rates. Tighter credit would eventually improve the country's
current account deficit, by slowing down consumption (fewer imports translates
into a better trade balance). But it will hurt the stock market.
The rand is undervalued
on the basis of nearly any economic analysis. If you give the currency enough
time, it will strengthen from current levels. In fact, a short squeeze is
around the corner. But that doesn't mean a bottom in place. South Africa
imposes strict foreign exchange rules to keep cash from pouring out of the
country. Basically, the currency market is challenging the government to
relinquish its tight controls.
Once the government
capitulated, the bear campaign would be over. Of course, the public would
start trading in rands for dollars, since weak hands always sell at the
bottom. The timing of any change in currency controls is impossible to predict.
Our sources tell us that it will happen - within two years.
Nevertheless,
the rand bear market should run its course in the near term. A rally in
the currency will trigger a rally in the bond market - which in turn will
cause stocks to rally. Until the currency rallies, the Southern African
Fund (SOA-NYSE) will remain trapped in a range between US$15.50 and US $17.50.
Considering SOA has a net asset value (NAV: the actual value of the fund's
holdings) of US$20, the fund will eventually break the upper end of the
trading range.
More importantly,
Mark Breeden, SOA's stock picker, has taken a defensive position in high-yielding
stocks and bonds. The closed-end fund's NAV is mostly immune to a market
correction on Johannesburg. And you can look forward to a fat, juicy dividend
check at the end of the fiscal year. Since the closed-end fund is not widely
followed, I don't expect a drop in the market price on the ex-dividend date
(usually, stocks drop slightly after a dividend payout).
The long-term
picture for the region remains bullish. Take profits over US$19 - after
the upcoming dividend payout.
For more information,
contact Clara Sierra, c/o Alliance Capital Management, 1345 Avenue of the
Americas, New York, NY 10105, USA, tel. (212)969-2414, fax (212)969-1688.
Sensing and controlling profits
Williams Controls
(WMCO-NASDAQ) is Taipan's electronic sensor and control pick. Williams'
core business is its electronic foot pedals for trucks and buses. Unfortunately
for Williams, but fortunately for us, the trucking industry is in the dumps
- giving us the opportunity to buy the stock at depressed levels.
Of course, higher
oil prices never help trucking. But trucking stocks are so depressed, they're
due for a rebound. Short of a recession, the trucking industry should get
rolling by early to mid 1997. Since Williams has 60% of the market for Class
8 trucks, and 100% of the market for buses, Williams will quickly get back
where it was in late 1995, when the stock was trading at US$3.75.
Williams' most
explosive prospects are found in its startup affiliates. Bringing its expertise
in sensors/controls to revolutionary new applications, Williams is on the
verge of opening up entirely new markets for its technology.
When I toured
the facilities of Williams' Aptek division in Florida, I thought of "Q"
from the James Bond movies.
Aptek specializes
in selling value-added sensors and controls, like its new "tilt sensor"
that can measure changes in any dimension using a purely electronic mechanism.
Aptek's scientists, somehow combining the grim analytic stares of researchers
with the bubbling enthusiasm of schoolchildren, showed me their latest sensor/control
technology. It's amazing what can be done with electronics.
I can't flesh
out the most promising technology, because I don't want to interfere with
any negotiations in progress. Suffice it to say that every sensor/control
application or product I looked at had one idea in common: use state-of-the-art
technology to replace crude mechanical systems with a more efficient electronic
system ...
Thomas Itin,
Williams' CEO, is committed to selling value-added products, instead of
trying to compete in the low margin "commodity" business. Itin
has built up a sales network that pushes Williams' current products, like
the brake pedal... With a distribution network in place, Williams is in
a position to start moving its high-margin, revolutionary new products directly
on to the market.
Geotek, Williams'
GPS/GIS division, has successfully completed a pilot demonstration of its
automated train tracking system for the Tri-Rail Commuter Authority in Washington,
D.C. Basically, GPS (Global Positioning Systems) is a free satellite system
provided by the Defense Department. With Williams' software, you can use
GPS in breakthrough applications, like "cyber-farming" and automated
collision avoidance. Geotek gave a presentation of its project at a federal
GPS railroad conference in Washington, DC.
Taipan expects
GPS farming to be even bigger than agritech ... If you got in on Mycogen,
Taipan's agritech play, you just cashed out with a 69% profit. With demand
for grain growing in China and other developing economies, and with grain
reserves at their lowest level in decades, farmers are desperate for new
technology to boost agricultural yields.
GPS satellite
technology offers a cost-effective means of monitoring crops - while minimizing
the need for pesticides. And unlike genetically-resistant seeds, "cyber-farming"
won't get brainwashed "green" consumer groups up in arms ...
Williams' new
divisions are still in the startup phase. But all the pieces are in place
to create a highly profitable company. The company promises an excellent
first quarter. After meeting with Williams' scientists, salesmen, and mid-level
management, as well as top brass, I believe in the company's long-term growth
prospects. If the company lives up to its promises, WMCO will trade at US$4
or higher in 1997. By 1998, this stock should be trading in the US$6 to
US$8 range.
Fortune magazine
named Williams as one of the "100 fastest growing companies" in
the United States after I initially recommended the stock.
Taipan maintains
WMCO as a buy under US$2.50.
For more information,
contact Thomas Itin, CEO, c/o Williams Controls, 14100 SW 72nd Ave., Portland,
OR 97224, USA, tel. (503)684-8600, fax (503)684-8675.
Indian giver
1996 was a painful
year for investors in India. The Bombay Sensitive Index flew all over the
place - losing over 8% by year-end. Yet Taipan used the volatility as an
opportunity to take 32% returns out of the market - and get back in at the
lows for more.
Our India play
is the Morgan Stanley India Investment Fund (IIF-NYSE). We bought the India
Fund at dirt-cheap levels under US$9, using the run before the election
as an opportunity to take profits above US$12. When the Sensitive Index
caved in after the election, Taipan jumped back in for more under US$9.
Only this time, we're hanging on for the run to US$16.
India is the
world's second-largest economy. The country is going to be one of the major
growth stories of the next centuries. With over a billion consumers, India
is a gold mine ...
But the real
growth will come from the high-tech industry. Indian software companies
are already exporting over US$1 billion annually - and the figure keeps
growing. The number of Indian software companies are growing at a compound
rate of 46% per year. That's twice as fast as the U.S. software industry.
A few years ago,
Indian software companies only competed on the basis of price. But that's
starting to change. Trained in top-rated graduate schools, Indian scientists
and software engineers are some of the sharpest in the world. Now, Indian
companies peddle their software on the basis of speed and performance. A
decade ago, the industry had an annual turnover of only US$10 million. In
1996, the industry was worth US$1.2 billion - an 11,900% gain!
Move over, Palo Alto
Unlike China,
India isn't just a source of cheap unskilled labor. Its ace up the sleeve
is a highly skilled workforce, willing to work for just a fraction of their
Western competitors' wages. Taipan predicts that the next wave of emerging
market growth will come in countries like India and Korea, where low-cost
pools of engineers and scientists will create techno-powerhouses that will
make Silicon Valley look like Detroit in the mid-1970s.
As a long-term
play, India will be one of the world's top-performing markets. And at levels
below 2900, this is about as low as you go. The market dropped on profit-taking
after the 1996 election and never came back. But all the factors depressing
the market are reversing.
The central bank
eased reserve requirements in 1996. Looser credit will translate into higher
stock prices next year. And high interest rates will come down, improving
liquidity. Domestic investors have been heavy sellers in the last twelve
months, but they will return as sentiment begins to improve. In fact, market
sentiment is so low that the psychological preconditions of a bottom are
in place. At the same time, the government is trying to win back foreign
direct investment after the Enron escapade.
Buy the Morgan
Stanley India Investment Fund (IIF-NYSE) under US$9.
Year of living dangerously
Xoma Corporation
(XOMA-NASDAQ) is developing biotech products that are critical for human
survival. The most important product is Neuprex, which can kill antibiotic-resistant
strains of bacteria. 1997 will be a critical year for some of the key Neuprex
indications.
In the first
quarter of 1997, Xoma should complete a pivotal trial for the trauma indication.
When you suffer internal hemorrhaging, "gram negative" bacteria
leak into your bloodstream. This causes your immune system to kick in, unleashing
a natural defense system against the bacteria. Unfortunately, when you kill
gram negative bacteria, you release "endotoxins" contained in
the bacteria's cell walls.
If you're lucky,
your bloodstream will never get flooded with endotoxins. The deadly poison
can trigger limb loss, organ failure, and death.
In January, Xoma
will expand its study of meningococcemia, a deadly infant killer. Current
results are promising, and the stock should get a lift if results are statistically
significant. Xoma should also get pre-clinical results from its collaboration
with Genentech, a premiere biopharmaceutical company. Genentech is financing
Xoma's development of hu1124, a treatment for psoriasis and transplant organ
rejection.
Xoma should also
get results from its investigation into the antibiotic adjuvant indication
in the first quarter. Basically, you can combine Neuprex with antibiotics
to knock out superbugs. In the first half of 1997, Xoma should advance its
cystic fibrosis research.
A high-level
official just stepped down from the Japanese regulatory authority, so the
timing of possible E5 approval is difficult to predict. However, it's possible
that Xoma might experience an E5 breakthrough in 1997.
In January, Xoma
will make a series of presentations to the medical community in Europe.
This should draw interest to the stock. At the same time, institutional
investors should start piling back in, now that Xoma is demonstrating that
its technology shows promise. I expect the stock to drift back up to a minimum
target of US$8.
If Xoma surprises
the market by clearing E5 through Japanese regulatory authorities, XOMA
will fly into the lower teens. It's possible that Xoma could experience
some setbacks in its Neuprex investigations, so expect volatile trading
patterns.
Buy Xoma under
US$4.50.
For more information,
contact Jack Costello, Xoma Corporation, 2910 7th St., Berkeley, CA 94710,
tel. (510)644-1170, fax (510)644-2011.
Buying on rumor, selling on fact: 69% profits from the agritech boom
Taipan has followed
Mycogen (MYCO-NASDAQ) for years. The company keeps promising that it's close
to profitability. Yet year after year, Mycogen keeps posting a loss. It's
time to take some money off the table. Mycogen is in our target selling
range of US$20 to Us$25.
The stock started
flying on the news that DowElanco bought a controlling 51.8% stake in Mycogen,
to prevent a takeover bid from rival Monsanto. DowElanco is a pesticide
venture formed by Eli Lilly and Dow Chemical. DowElanco now has a controlling
seat on Mycogen's board.
Mycogen now has
more resources to fight Monsanto in its dispute over patents. The patent
lawsuits have been a constant drag on Mycogen's bottom line. With DowElanco
at its back, Monsanto is in a better position to take on its larger rival.
The Bt gene is
big business. Taipan predicts that agritech will be one of the major growth
stories of the next few years. With Mycogen's extensive library of Bt research,
the company will wrest a bigger piece of market share from Monsanto.
Nevertheless,
MYCO has gotten ahead of itself. Sell your entire position at the market!
For more information,
contact Mike Sund, c/o Mycogen Corporation, 5501 Oberlin Dr., San Diego,
CA 92121 USA, tel. (619)453-8030, fax (619)453-5494.
Turning human tragedy into a profit opportunity
The second time
I visited the Failure Group (FAIL-NASDAQ) in Menlo Park, CA, I spent some
time walking around the streets of San Francisco. Somewhere near Fisherman's
Wharf, a malodorous gentleman bundled up in filthy rags muttered, "I
predict there will be earthquakes, plane crashes, the bridges will collapse..."
I didn't stick around to hear more.
But he had a
point.
If there's one
thing you can predict, it's that man-made disasters will keep happening.
And Clinton is back in the White House. That means an end to tort reform.
The number of lawsuits will keep growing. And the Failure Group (FAIL),
the world's leading investigators of engineering and scientific failures,
will keep raking in business.
If there's a
big disaster, there's going to be a big lawsuit. And with millions at stake
each trial, lawyers will hire the best in the business to provide expert
testimony.
When it comes
to analyzing disaster, you call the Failure Group. The company has been
involved in the assessment of just about every recent disaster you could
name. The TWA crash, the Oklahoma City bombing, the space shuttle explosion,
the LA earthquake, the collapse of the shopping mall in Korea ...
Failure has gone
a long way in reducing expenses and improving profit margins. To retain
a staff of top-quality scientists, Failure has to fork over substantial
paychecks. It's a chronic problem for Failure's operating margin. But Mike
Gaulke, Failure's CEO, has succeeded in drastically cutting costs.
Failure is sitting
on US$25 million in cash, which it will use to finance acquisitions. Gaulke
is looking for strategic acquisitions that will add to Failure's engineering
and environmental revenue streams. While Failure continued to grow in 1996,
it failed to surprise to the upside. The first quarter of 1997 is critical
for Failure.
The company is
not widely followed. If Failure can come through with strong earnings, the
stock should start heading to US$8 and higher.
Taipan maintains
FAIL-NASDAQ as a buy under US$6.
For more information,
contact Michael Gaulke, CEO, c/o The Failure Group, 149 Commonwealth Dr.,
P.O. Box 3015, Menlo Park, CA 94025, tel. (415)688-6951, fax (415)617-6453.
Working for the Yankee dollar
Back in 1994,
when fund managers were doing the Macarena in the Mexican bolsa, Taipan
recommended bailing out of the Mexico Fund... right before the crash. In
the panic selling that followed, Taipan plunged back into Mexico, recommending
Telmex (TMX-NYSE) at the lows.
Telmex remains
Taipan's play on the Mexican economy. The IPX index gained 20% in 1996 -
and our outlook for 1997 is even more bullish. Earnings growth may slow
down in the next twelve months, but price/earnings ratios will expand as
emerging markets become popular again. Over the long term, Mexico will be
one of the major growth stories of Latin America.
If you followed
our advice, and used a simple, ultrasafe options strategy, your cost basis
should have been reduced to approximately US$25 from our recommended entry
level under US$30. Taipan continues to recommend "covered call writing"
as a means of boosting your returns while actually lowering risk.
By writing a
call against position, you are giving someone else the right to buy your
shares from you at a fixed price. Let's say you write the US$30 January
calls against your position for US$2.50. You bought Telmex at US$29. If
Telmex climbs above US$30, the owner of the call has the right to buy your
shares at US$30. Since you bought the shares at US$29, you make US$1 on
the shares and get to keep the US$2.50 premium. The worst-case scenario
is a locked-in 12% profit.
If Telmex doesn't
climb above US$30, you get to keep both the shares and the premium. This
is the best-case scenario. Your cost basis in this example is reduced to
US$26.50. Over time, you can raise the "strike price" of the call
to capture a bigger profit (a "US$30 January call" equals a January
call with a US$30 strike price).
The only risk
you take by using the covered call strategy is the sacrifice of unexpected
gains in Telmex. Even if Telmex flew to US$50, you'd still only make the
difference between your adjusted entry price and the strike price. But you'd
still take home a profit, so it's a risk we're willing to take.
The biggest risk
to Telmex is the emotional correlation between Latin American and U.S. stocks.
Since there's no real reason for the markets to move in the same direction,
Taipan expects the regions to eventually diverge. But the vulnerability
of the U.S. markets to a minor correction does indirectly pose a risk to
Telmex.
Taipan views
any weakness below US$30 as a buying opportunity. The next move down in
early 1997 will be the last. Telmex should trade in the US$35 to US$40 range
in the next twelve months.
For more information,
contact Morgan Guaranty Trust, P.O. Box 8205, Boston, MA 02266-8205, USA,
tel. (617)774-4237, fax (617)774-5661.
Brazil - the sequel
Brazil is going
to be one of the major Latin American growth stories. I'm anticipating earnings
per share growth of just about 38%. That means the market is trading at
around 10 times next year's earnings - and that's as cheap as this market
is going to get.
If you invested
in Brazil in 1990 when inflation was running at 50% per month, your broker
would have thought you were crazy - and you would have laughed all the way
to the bank with a 1300% profit in dollar terms. While the same explosive
growth potential no longer exists, Taipan expects Brazil to outperform most
of its neighbors.
President Cardoso
squashed hyperinflation, instituted congressional reforms, and liberalized
the economy. Under Brazil's constitution, Cardoso would have to step down
at the end of his term in 1998. This is creating some political uncertainty,
since the leading contender for the presidency is a hard core populist.
Taipan predicts that Cardoso will strong-arm the congress into changing
the constitution.
It's the ideal
scenario for the market. Strong earnings growth will be rewarded with mountains
of foreign cash as the political risk discount evaporates. Estimates for
foreign direct investment next year stand around US$10 billion. Taipan estimates
that consumer price inflation will rise about 13% next year. That should
free up domestic liquidity, sending the market up even higher.
The Brazil Fund
(BZF-NYSE) is Taipan's vehicle of choice for investing in Brazil. Trading
at a 17% discount to its net asset value (NAV: the actual value of the fund's
holdings), it's the only way I know of buying Brazilian equities for 83
cents on the dollar. Taipan expects a 40% increase in NAV over the next
twelve months. At the same time, the deep discount to NAV will contract
as closed-end funds make a comeback.
Applying a projected
10% discount to an estimated NAV of $36.68, you get a target of $33 for
1997. However, selling pressure will build up between $28 and $30. Buyers
who got in at the peak in 1994 are waiting for a chance to get out. Taipan
maintains the Brazil Fund as a buy under $20 and a sell over $28.
The Brazil
Fund's biggest holding is Telebras (TBR-NYSE), a telephone company. Taipan
recommended Telebras as a speculative play under $33. At current levels
in the mid-$70s, the stock looks vulnerable to a minor correction. If you're
in Telebras, sell your shares immediately and buy them back under $60.
For more information,
contact Scudder, Stevens, & Clark, 2 International Place, Boston, MA
02210-4103, tel. (617)295-1000 or (800)349-4281, fax (617)295-4090.
Sizing up Supertech speculations
As a purely speculative
play for aggressive investors, Taipan recommended three beaten-down Internet-related
stocks in early 1996: Raptor (RAPT-NASDAQ), Spyglass (SPYG-NASDAQ), and
Diamond Multimedia (DIMD-NASDAQ). When it became clear that NASDAQ was about
to experience a bloodbath, Taipan recommended bailing out of the speculative
supertech portfolio - weeks before the 20% correction in July.
From the recommended
entry levels, RAPT and SPYG were break-even trades, while DIMD triggered
the 20% stop loss. If you ignored the warnings and held onto the speculative
positions, RAPT is down 15%, SPYG is down 30%, and DIMD is down 20%. If
you have any SPYG or DIMD, liquidate your entire position immediately.
While SPYG and
DIMD have failed to live up to their promises, RAPT is a viable company.
RAPT specializes in Internet security, a growth industry for the foreseeable
future. RAPT's "firewall" technology is extremely popular. The
company managed to pull a US$0.05 profit in the third quarter.
But the company
issues press releases on a daily basis. This looks like a desperate attempt
to support the share price. If the company keeps growing, RAPT will eventually
stabilize at a much higher level. Taipan won't resume coverage of RAPT until
the company has proven itself ...
For more information,
contact Raptor, 26 Hickory Dr., Waltham, MA 02145 USA, tel. 617-487-7700.
White Christmas ...
In the 1996 Forecast
issue, Taipan predicted that the congressional investigation would let Colombia's
president, Ernesto Samper, off the hook. Samper's campaign finance man admitted
to accepting drug money. Luckily for Samper, nearly every member of Congress
has ties to the cartels, so no one was willing to lead a crusade against
corruption.
It is tempting
to view Samper's exoneration as bullish. But over the long term, it may
mean that bad news is still overhanging the market. Samper may have a hold
on power for the time being, but at the price of climbing into bed with
the military. Evidence is emerging that Samper is supporting paramilitary
groups backed by the military.
An all-out war
between drug traffickers, paramilitary groups, guerrillas, and the military
could leave the country in ruins - at a time when the general population
is totally disillusioned with the presidency. The buying opportunity will
come later, when the country appears on the brink of disaster.
The long-term
prospects for the Colombian economy look strong. Over the next three years,
GDP should average about 5.5% Inflation will remain under control. But over
the next twelve months, Argentina and Brazil will outperform Colombia.
Cementos Diamante
has been a major disappointment in 1996. It made a nice run up to US$21,
but you might have missed the chance to bail out above our initial sell
target of $US20.50 with a 28% profit. The Colombian cement company has since
sold off into the lower teens.
Instead of
waiting around to get stopped out, sell Cementos Diamante at the market.
Other Latin American
markets are more attractive ... and a handful of cement companies in Eastern
Europe have better growth prospects. If Cementos Diamante trades down to
more attractive levels, I may cover the stock again.
For more information
on Cementos Diamante, contact Todd Hathaway, c/o Baring Securities, 667
Madison Ave, New York, NY 10021, USA, tel. (212)350-7718, fax (212)350-7949.