The InvestMentor

June 14, 1999

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I was blabbing to my researcher about stock selection the other day, and it occurred to me that I’ve never written about the process I use to pick stocks. Right now, I’m selecting a new holding for my master list of stocks. I invite you to come along with me over the next three weeks as we approach this decision together. This is a lengthy and laborious process, but hasty stock selection leaves the result to chance (if you can’t do the time, don’t do the crime.). Before we begin, please take a minute to enjoy the following obligatory disclaimer:

Lest I be accused of slimy practices, I’m stating up front that I will be purchasing the stock that comes out of this process some time before the final decision is published. Further, I would not recommend that anyone else necessarily follow suit. The important part of this three part series should be the process, not the outcome.

Thank you and welcome back to the program. My investment selection process works from the "top down." The first decision I make is about which country to invest in. I’ve already determined which countries I want to participate in (see my "Pariah" series of articles earlier this year). In this case, I’m seeking a new company from the technology sector in the U.S. to replace my big disappointment of 1999 (I won’t name names, but the stock rhymes with "Tompaq"). The next part of the process (and the hardest one to pass along to you) is the industry selection, from within the technology sector.

The best way to get a general sense of which industries are growing fast is to read a lot of business news. My ideas and investing themes can come from many sources, and develop over time. I take many of my technology cues from the daily articles in the "Tech Center" section of The Journal and websites like InternetNews.com. I’ve recently developed an interest in "broadband fixed wireless" telecommunication companies. Broadband transmissions are those with very large amounts of data, voice or video (including the kinds that dominate the Internet). Fixed wireless refers to companies that send out voice, data, and video signals from radio towers using high frequency microwaves. Now I’m not an engineer, or an expert in this technology; but I don’t think you need to be as long as you’re willing to invest enough time in reading about an industry before investing there.

Broadband fixed wireless is attractive for several reasons. The demand for broadband capacity is exploding right now. The copper wire-based infrastructure that dominates this country’s telephone network is horribly inadequate for the demands of today. The current battle to provide broadband capacity is being waged between the DSL folks (companies that convert data and voice to a format that allows for high speed transmission across the copper and fiber network) and the cable folks (companies that convert cable TV coaxial to two-way piping that allows for the transfer of Internet data with the use of a cable modem). Even if these technologies are successful, they will not adequately serve the entire commercial and residential need for broadband access. The wireless approach is an attractive alternative to "wired" solutions for obvious reasons: it’s a less cumbersome connection point-to-point, it’s more aesthetically pleasing than wired connections, and in many cases, it is more cost effective than installing wired, broadband alternatives.

With this industry in mind, I went down my three typical avenues to come up with a list of who the "players" were. These include: 1) searching for online articles on the industry; 2) reading reports from the brokerage research analysts that cover the industry; and once I have a few names, 3) screening for competitors on Quicken.com.

I began by trying to dig up articles on "broadband wireless" and "fixed wireless." I searched using the search engines (Excite, Yahoo, etc.), the article archives at The Journal’s online edition, and the search feature at InternetNews.com I found several articles, but two very specific ones in The Journal helped the most. One was "Wireless Broadband Offers Promise—And Volatility" (4/20/99) and the other was "‘Fixed Wireless’ Is Attracting Investments From Big Firms" (6/3/99). Six names were mentioned between the two articles. They were: Teligent (TGNT), Winstar (WCII), Advanced Radio Telecom (ARTT), CAI Wireless (CWSS), BizTel (part of At&T), and Nextlink (NXLK).

Next, I ran these tickers through a search for brokerage reports at Multex.com. (Multex sells brokerage research on a per-report basis on their site, as well as through partnership with folks like Quicken.com). What I looked for was the industry reports that come up when running the six names. Many of the same industry reports came up for each of these companies.

Finally, I ran the tickers through Quicken.com’s comparison screen. Because the screen uses SIC codes, it lumps together all sorts of competitors that are not necessary broadband fixed wireless. Thus, because of the focused nature of this industry, it wasn’t much help. Usually, however, it’s a good source of competitors, especially in industries with fewer companies.

The subsequent screening of the six companies did not yield any additional competitors. At this point, I had a sufficient familiarity with the names so as to eliminate three from consideration. Advanced Radio is a smaller, regional provider and partly owned by Winstar and Qwest Communications. CAI is another smaller player and is being bought out by MCI Worldcom. BizTel is not investable as it is an AT&T division.

That leaves us with three finalists, all of which are CLEC (competitive local exchange carriers—companies allowed to compete with the Bells at the local level):

Teligent (TGNT)-Provides broadband phone and data traffic services to small and mid sized businesses, from roof top antennas. Currently available in about 27 markets. 41% of company was recently acquired indirectly by Liberty Group. They are the fastest growing of the three companies.

Winstar Communications (WCII)-The dominant licensee of high frequency bandwidth rights in the U.S. (in excess of 28 GHz). They have penetration in over 30 markets and expect to be in double that amount by year end 2000.

NEXTLINK Communications (NXLK)-While currently in about 20 markets, they are aggressively buying access to more . They have a diversified portfolio including fiber assets and a DSL platform with help from Covad.

From here, we’ll look at the Quantitative features of all three companies. We’ll finish the analysis by studying the Qualitative attributes during the following wee. If you want to see how this all comes out, stay tuned. We’ll be back next week. Same Bat time, same Bat channel.