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The mystery of the high-tech stock "Bubble" -- profiting in a speculative frenzy
by Briton Ryle
Few technological advances that make our lives what they are today could have been achieved without a speculative environment. So when someone tells me that Internet or tech stocks are over-valued or that the stock market is a bubble I say, "Damn right, isn't it great?"
When the bubble breaks and all my investments go down the toilet, and the bank forecloses on my house, I'll be living in the woods under a pile of leaves. But you can bet my pile of leaves will have high-speed wireless Internet access and I'll be watching re-runs of Andy Griffith on the high definition TV I got at the thrift store for twenty bucks.
Who wants to get e-mail on a pen?
I swear, I'm not making this up. Some Japanese company has made a wireless pen that you can get your e-mail on. This is an example of what we'll call "mal-invested capital." There's always a few nuts out there with more money than sense. And that's how it should be.
The important thing is that there's cash available for such cockamamie schemes. If money were pegged to a fixed amount of gold, only the most sound ideas would make it past the drawing room. There simply wouldn't be enough capital and the junk bond market wouldn't fill the void.
It's not the joke, it's how you tell it
Imagine Jeff Bezos asking some dusty, moth-balled banker to lend him money to start a business that'll never turn a profit. The old boy might have enough life in him to conjure up a chuckle. But tell the same thing to millions of Internet-crazed investors and... well, you know.
Nothing is a success from the start. Most pioneers start out as celebrated explorers and end up as shrunken heads in a medicine man's hut. But they have to have the means to fail.
Bezos is a pioneer. And I won't be surprised if his company, Amazon, doesn't make it. But I don't own Amazon stock, so I don't really care. If he doesn't figure out how to make money, someone else will. Amazon's promise may be so much hot air, but the promise of e-commerce is very real.
Profit in the Technology Age
Buy and hold just doesn't make sense when new technologies keep popping up like pimples on a teenager's face. You have to use a short-term horizon to catch the rising tide and not get beached when the water rushes out. The key to this strategy is vision and knowledge -- knowledge of where technology is today. And vision to see where it's headed.
Just look at broadband Internet access:ÝThe promises of broadband are mouthwatering -- video conferencing, movies on demand, 3-D graphics, interactive TV, etc. But the current state of our broadband networks won't support these "data-centric" promises. Have you ever tried to watch streaming video over even the fastest Internet connection? It looks more like stop-action photography than video.
Playing the game
I have a theory as to why the promises are being made prematurely. I believe these companies are playing the Wall Street game. The companies make the promise, investors pile into the stock, ramp up the price and then the stock can be used as acquisition tender to help make the dream a reality.
But until that is realized, companies have to find a way to sate the appetite of their customers or face massive revolt and accusations of fraud. Not to mention the unspeakable possibility of losing market share. Huge opportunities exist for the companies that can bring data service products to market now. That's why I like FastComm Communications (OTC BB:FSCX) and Pliant Systems (OTC BB:PLNS) so much.
Filling in the gaps
With the development of photonic switches by companies like Nortel, Sycamore and Lucent, networks will carry massive amounts of data at fast as light speeds. But that doesn't help us now.
Homes are still connected to fiber backbones by copper wire. Digital Subscriber Line (DSL) is essentially a stop-gap solution to the data-to-the-home dilemma. DSL does increase data speeds exponentially and it allows you to use your phone while on-line. But DSL has problems that aren't easily solved.
For starters, to get DSL, your home or business has to be within 17,500 feet of the telephone switching office. This alone will keep DSL from being the dominant high-speed technology. But Pliant Systems can help.
Pliant Systems recently announced a new product, the Pliant 3000. The Pliant 3000 extends the range of DSL services to 50% of those that are currently outside of coverage areas. The Pliant 3000 should be a godsend for CLECs (competitive local exchange carriers) who want an inexpensive solution for maximizing their data services. The company estimates that local voice and data services is a US$500 million market. The Pliant 3000 is well positioned to corner a significant chunk of this market.
The rapid pace of change means a life-span for the Pliant 3000 of probably only a couple of years -- an eternity in today's fast moving market. And, who knows, in the meantime, Pliant may have the savvy to develop products that keep it in the game for the long term. No doubt that's the goal. But that's not really the point. It's a lot easier to see who stands to profit in the next few months rather than the next few years.
The kicker
Pliant Systems shares patents with a company called Next Level Communications (NXTV:NASDAQ). The two companies' flagship products are very similar. The biggest difference between the two is valuation. Next Level does US$55 million in sales, while Pliant does US$38 million. However, Next Level sells for 94 times sales, while Pliant sells for 3.5 times sales. Next Level is clearly overvalued, Pliant is clearly undervalued.
Pliant is attending trade shows and doing product demonstrations to increase awareness of its product. An important show, COMNET, is being held in Washington, D.C. Jan. 25-27. I look for this show to be a catalyst for the stock.
Increased awareness and a couple of contract announcements could easily put Pliant's stock in the US$20 range. I am raising my entry price for Pliant Systems (OTC BB:PLNS) to US$10.50. Remember to check the homepage for further information. You can contact Pliant Systems at: P.O. Box 13737 Research Triangle Park, North Carolina 27709-3737. Investor Relations Telephone: 919-405-4618; Investor Relations Website.
And in this corner...
It's FastComm Communications. A couple positive news releases along with fundamentals indicative of a rebound have seen this stock nearly double, from US$2 to US$3.50 over the last month.
But don't worry, that's only the beginning for this relatively unknown player. FastComm's products target the local area network (LAN) sector, basically office and company networks.
The award-winning MetroLAN product lets businesses build a single network to handle all of their voice, data and video needs. Used in conjunction with FastComm's larger GlobalStack-EX, companies can build a local network that supports thousands of locations.
David vs. Goliath
FastComm also makes routers and switches for frame relay and IP networks. The companies' products are aimed at the Unisys and IBM mainframe market -- ambitious to say the least. But FastComm offers a better product than IBM at a 40% discount, not to mention that this equipment is flexible enough to accommodate data rates spanning from 9.6 kbps all the way up to a T-1 line. That should be enough performance and price incentive to open the market's eyes to the benefits of dealing with a small company.
Despite the recent jump in price, I believe there is plenty of upside potential for FastComm. FastComm will be at COMNET in late January, too. A good showing could easily translate into a US$10 price tag. Again, please visit the homepage for updates. Buy FastComm Communications (OTC BB:FSCX) under US$3.50 a share. Contact Information: FastComm Communications Corporation, 25472 Holiday Dr., Sterling, Va. 20166; Phone: 703-318-7750; Investor Relations Website.
Voluntary Disclosure -- I own shares of FastComm Communications.
My January picks are off to the races
I posted an update for SAFLINK (ESAF:NASDAQ) on the website January 9. Right on cue, SAFLINK released a double whammy. The company announced the creation of a new division, the Internet Products Group.
To head the new division, SAFLINK hired industry vet Bob Perez, who has an impressive pedigree, including a stint as the head of Apple's Macintosh Software Evangelism group. Leave it to Steve Jobs to come up with such an ostentatious name.ÝSAFLINK is also hiring ten senior software engineers. This ambitious expansion is just what the business needs.
Ashton's no slacker either
With limit orders in place, we should have just sneaked into Ashton Technology Group (NASDAQ:ASTN) under my US$6.50 purchase price. And that's great, because Ashton promptly tacked on two bucks and has been sitting around US$8.50 since January 2nd. And you'll notice, the "good news" rule is at work here, too.
Hot on the heels of a deal with an Asian company to help bring the eVWAP system to Hong Kong and even China, Ashton announced that eight firms have agreed to use the eVWAP system to clear and settle trades by institutions, pension funds, and money managers. Names were not released, but I expect another news release with more details soon.
And the first shall be last...
I now have a soft spot in my heart for Geoworks (GWRX:NASDAQ). My first recommendation to Taipan members, Geoworks has made you money and me proud. Once again, I don't recommend ignoring entry prices, but I know that many of you did and bought Geoworks at US$7.00. Hindsight's always 20/20, but that was the right move.
After hitting an intra-day high of US$20, Geoworks has settled into the US$14 range. I see US$14 as a strong support level. A break through US$14 would make US$12 the next support level. If Geoworks falls below US$12, there would be no significant support until the US$7-US$8 range. To lock in our gains, apply a mental stop at US$12. I doubt we'll see that level, but it's good to have a game plan in place.
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