The InvestMentor

June 6, 2000

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Ah yes...all evidence points to the arrival of midyear in the high desert of central Oregon. Real long days are marked by cookouts that begin at 8:30 p.m., and warbling birds that wake you up at 4:30 a.m. Sun parched lawns are drying up like the college funding of my "second" senior year. My inner-flyfisherman yearns for a Royal Humpy (that’s nothing sordid having to do with Mrs. Valentine, as any angler will attest). Most of all, a reflective investment manager gets to appraising his predictions for the year, and to pondering what the rest of the calendar has in store.

It is within this framework that I bring you my Midyear 2000, Halftime Report. Before we’re finished, I’ll pick over my suggested buys and sells from January, review the acuity of my market predictions, and finally, postulate the "What’s In" and "What’s Out" for the rest of 2000.

TOP STOCKS TO SHORT FOR 2000

In an uncharacteristic, Scroogeian fashion, I began my forecasting for 2000 over the holidays with a list of stocks to avoid, sell, or outright short. Bah Humbug. Alas, my "Top Five Shorts for 2000" have, for the most part, been right on the money. All but one stock is down considerably, and collectively they’re off 36% from the start of the year. Stocks appear in a descending, self-congratulatory order:

VA Linux (LNUX) Last year, this stock had the unique quality of possessing the simultaneous titles, "Largest one-day gain for an IPO," and "Most over-hyped stock of all time." From it’s IPO offer price of $30, the stock shot up to $320 and managed to close its first day of 2000 at $192. I predicted it would fall below $50--and it did, eventually trading as low as $26 7/8. Today it’s around $38, down 80% from the start of the year. But at these prices, it’s at least close to the original offer price. IPO doesn’t mean "ignore the price-offered"—that $30 offer price was not some number arbitrarily arrived at by the investment bankers.

Qualcomm (QCOM) The second most over-hyped stock of all time, Qualcomm entered the year at a split-adjusted price of $179 5/16, and a discomforting P/E of 376. My guess was that the stock would be halved—and it’s traded even lower: $60 three weeks ago. Today it’s at $64 1/2, down 64% from New Years. Getting cheaper, it’s still not a screaming bargain. Wait to buy it until nobody wants it anymore.

MarketWatch (MKTW) The "big news" last year was how much folks would pay to buy stocks of "big news" companies that went online. CBS Marketwatch leapt to the forefront of the financial content race, and it’s stock debuted in the triple-digit price range. It entered 2000 at $36 1/2 and I foresaw it approaching $17 at some point. It did. In fact, after briefly touching $13, the stock’s back to $23 3/8, but still down 36% for the year. Let’s wait ‘till it makes money before evaluating it as a buy prospect.

4 Kids Entertainment (KIDE) This toy company licenses products under the Pokemon label which, if you haven’t heard lately, has waned among the interest of youngsters. In fact, I think Pokemon is Japanese for, "That’s soooo yesterday!" The stock entered the year at $30, already limping from the beating it had taken from its peak in the $90s a month earlier. Nevertheless, the stock actually broke below the $10 floor I set, but has since come back to $21, leaving it off 28% for the year. Depending how fast the company can hop on the newest licensing bandwagon, it might hold promise as an ongoing entity.

Best Buy (BBY) Best Buy’s stock continues to hold up, in spite of its obnoxious, strong-arm buy-our-warranty-and-maintenance-policy sales tactic. While this will likely catch up with its sales eventually, the stock has done well this year. It entered the year at $50 1/4, briefly brushed the $40s, but is now at $64 5/8, up 29% year-to-date. In fact, I capitulated on this "short call" back in March, atoning for my miscue. Upon reflection, my not liking the stock doesn’t warrant a "short" recommendation. However, I still believe that, Best Buy isn’t.

TOP PICKS FOR THE YEAR

Unlike 1999, this year it’s been easier to see what would go down, rather than those that’d go up. Nevertheless, my five early recommendations seem to be pulling for Team Valentine. I led the year off with a Christmas idea, followed with Three Picks in January, then made my most controversial call in March.

Edison Schools (EDSN) My Christmas gift, Edison Schools, is the largest private manager of public schools in the country. They’re starting to put up remarkable stats on the improving scores of students in their schools, as evidenced by the high retention by municipalities that are opting to re-up their contracts with Edison. It’s super to have a stock that makes money and improves the welfare of our youngest citizens. The stock entered the year at $15, and recently traded at $20 7/8, posting a 40% gain for the year, so far.

ExciteAtHome (ATHM) The first of my 2000 inaugural recommendations has been feeding off the bottom of the pond lately. Fewer stocks have proven more vexing to investors than ExciteAtHome, the resultant entity of the marriage of a leading portal and a wunderkind Net-access-via-cable firm. After entering the year at $43 1/2 with great promise, it’s slipped to the recently traded $19, down 56%. And now? Do I still support it? Yep, more than ever. Blinded by stubborn pride? Probably, but there are fewer stocks that could move up farther and faster than this enigmatic investment opportunity.

Brookdale Living Communities Inc. (BLCI) Also part of January’s picks, BLCI is an appealing assisted living community operator that was wrongfully tossed out with other elderly care stocks in 1999 on the back of a change in Medicare reimbursement—that had nothing to do with Brookdale. It started the year at $11 7/8, ran up to the $14s, and now trades at $13 7/8, logging a 17% gain, thus far. I still love it.

Health Care Property (HCP) My final pick for 2000 was Health Care Property, a REIT that owns medical facilities. While REITs haven’t been much more than a four letter word over the last couple of years, there seems to be signs of life for this sector, once again. From its 2000 starting price of $23 15/16 it’s climbed steadily and traded yesterday as high at $29, intraday. Thus, it’s up 20% in 2000—a big move by REIT standards. Couple bright prospects with a tasty 10% dividend yield and you have BLCI.

Cisco Systems (CSCO) Or just plain "Cisco" to many. The stock everybody owns—and the name that I publicly sold in a March article on why it was time to say "Adios" to the Cisco kid. Why sell the almighty Cisco? Alright, one last time, for anyone who wasn’t in the room. Cisco is, indeed, about the finest company in the country. But it’s stock is outrageously high, and it will never do enough in the intermediate term on the earnings side to live up to the astronomical valuations. Am I saying the stock will crater? No, but it’s going to be dead money for the next few years as it marks time, or drifts lower, while earnings rise and valuation gravitate to a more reasonable level. Think IBM (IBM) circa 1973—the only other stock to be as highly lauded as Cisco. From my sale at $69 it’s bounced around and remains at a subdued $64.50, down 6%.

MARKET OUTLOOK

I entered the year with a cautious optimism overall, and a belief that we had entered a world of not one, but two, markets. Due to the hoarding of techy stocks in 1998 and 1999, and the daily trading between the Dow and Nasdaq, we were clearly dealing with two markets. One that had a great two-year run to end out the century, and comprising a narrow, albeit exciting, segment of the economy. The other, with less to brag about, made up of most stocks, but less than stellar returns.

In April, my cautiousness about the risk level of the tech stock "market" turned to downright fear, culminating in a midnight epiphany following the day that saw a 700 point swing in the Nasdaq. I awoke and summarily halved my position in tech stocks, and then, for catharsis, wrote about the decision. It was April 4th. My fears were realized not long after as the Nasdaq shed nearly 40% from its peak. It’s since come back considerably, and while still below where I opted out of half of my tech exposure, it begs the question, "where do we go from here?"

My contention has been, and continues to be, that we are in a bear market—albeit applying only to that market that was leaping building in a single bound just last year. If this is a bear, we haven’t addressed it yet, but need to. But that’s not an uncommon bear market reaction.

From here, I think the Nasdaq rolls over, like an old dog, as we have yet to fully exorcise our speculative demons, in spite of a Nasdaq that tried to scare the wits out of us. Blame will be placed on everything from high gas prices to further Fed tightening and even the election. The market should bottom out somewhere near its traditional, seasonal low spot in the late fall, before making a goal line charge at year end in a celebratory cheer for the new President, whoever he be. Final score: S&P 500 up, high single or low double digits. Nasdaq, flat or negative return for the year. Most foreign markets beat the US.

Suffice it to say, as of this date in time, mine is a minority opinion. But if I’m right, the things that worked last year, won’t this year. There will be money to be made, just not in the same places that you could count on in 1998 and 1999. And the landscape will be very different from the early part of this year.

But I could be wrong...

-WLViv