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Market Outlook

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  • 1. Market Outlook October 2003 Market Outlook Special Focus on Health Care and Telecom An Economy on the Mend After the run the market has experienced over the past year -- particularly the NASDAQ -- this October could be volatile as investors look for evidence that the stock market has not gotten too far ahead of the economy. Corporate earnings season is just around the corner, and all eyes will be on 3rd quarter financial results. Corporations need to feel confident they can hit their earnings targets, before they will start hiring again. An improvement on the unemployment front would provide welcome confirmation that the recovery is on track and that the stock market rally can continue. During August, we deployed more cash into the market and we have kept that cash in play during September. Currently, our cash holdings are 10.1% of the total portfolio, up slightly from 9.4% last month. However, the rally has also made it harder to find good investment opportunities, since many stocks have already appreciated significantly. The result is that the portfolio is much more diversified than usual, with approximately 2,400 positions, an increase of about 40% over the number of names in the portfolio a year ago. As it gets more difficult to find attractive investments we have become more highly diversified across a number of smaller positions. Our portfolio currently has a mix of value and growth characteristics, when compared to the S&P 500. The 3-year revenue growth for the portfolio is 11%, compared to -3% for the S&P 500, showcasing that our investments are in the pockets of the economy where revenues have Each month, we publish insight into our current grown during the rough market of the last 3 years. investment strategy, which is based on the Even with growing sales, these companies remain holdings and daily trading activity of the m100. reasonably priced on a P/S and P/B basis, with an Our m100 index, (see inset on page 2 for details), average P/S of 0.9x and an average P/B of 2.3x has outperformed the market during 2003 by for the portfolio versus 1.5x P/S and 3.0x P/B for returning 32.5% compared to the S&P 500’s the S&P 500. Reassuringly, the companies also 13.3% as of September 26, 2003. have less exposure to debt at 23% debt to capital compared to 35% for the S&P 500, giving them In this month’s Market Outlook: protection should interest rates rise. • An Economy on the Mend (p1) • Health Care Holdings Climb (p1) Finding the Pockets of Opportunity • Growth Stocks Dominate (p3) In the long-run, the market generally prices stocks • Focus on: Health Care (p3) reasonably. But in the short-term, stocks are often • Focus on: Telecom (p4) mispriced. All opportunities to outperform the • Info Tech Update (p5) market are due to these short-term mispricings. • Learn Your Investment Strengths (p6) One of the best ways to identify where these short- • Marketocracy products and services (p8) term pockets of opportunity lie is to look at where For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 2. the best investors are putting their money. First we’ll take a look at the m100 holdings by sector, and then we’ll look at it by investment style. By Sector: Healthcare Holdings Climb Overall, our top 4 sectors remain unchanged from last ���� ����� ������ ���������� month. However, Healthcare holdings jumped significantly, ���� boosting the sector to the second biggest in our portfolio, ��������� ����� ����� ���� ������������� Consumer Discretionary dropped to become the fourth- ����� ����� ������� largest sector. ���� ������� ���� ��������� ������ ���� Information Technology: As we discussed last month, ���� Info Tech continues to offer solid growth opportunities. ���������� ���� ����� We increased our holdings in this sector again last month, ���� raising the concentration from 21% to 24% of total ����� m100 holdings. The increases were primarily driven by ������ ���� ����������� ����� purchases in Telecom Equipment and Semiconductors. ���� See page 5 for additional insight into our Telecom-related investments. Healthcare: After holding steady on our Healthcare holdings for the past two months, we made some major investments in the sector during September, particularly in Biotetchnology, Equipment, and Pharmaceuticals. This brought our investment in the sector up from 12% to 18% of total m100 holdings. Biotech stocks are warming up, as investors look for other avenues to profit beyond Info Tech, but there are still plenty of values to be found in this sector. Our Healthcare holdings held fast in September, returning 0.9% compared to a loss of 0.2% for the overall sector. See page 3 for additional insight into our Healthcare related investments. Financials: We continue to take profits in this sector. Although it remains our 3rd largest sector allocation, it dropped from 15% of holdings to 14% during September, as we sold portions of our holdings in Banks and Consumer Credit. We still like smaller banks, which tend to still have reasonable valuations, little analyst coverage, and consolidation possibilities. Given the spread What is the m100? ����������� ����� ����� ��� ��� ��� ������ Marketocracy monitors the performance of 60,000 portfolios 60% 50% ���� ����� on our website at http://www.marketocracy.com. Out of 40% ������� ������ ����� ���� these, the best 100 are chosen for our m100 group. The best portfolios combine consistent long-term performance with 30% 20% 10% proven performance in the current market. The m100 portfolio 0% -10% ��� ��� ����� ������� ����� is simply the combined portfolio of all m100 top members’ -20% -30% ����� ���� holdings. The portfolio achieves alpha over the market while maintaining what can only be deemed extreme diversification 1 2 3 2 3 3 2 3 2 2 3 2 -0 -0 -0 -0 0 -0 -0 -0 -0 0 -0 -0 with holdings currently just over 2,400 positions. l- l- ov ep ar ar ep ov n n ay ay Ju Ju Ja Ja M M N S N S M M For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 3. between the borrowing & lending rates, the smaller banks will continue to be profitable in the current interest rate environment. Consumer Discretionary: As a sector, Consumer Discretionary lost 4.6% during September, but our holdings fared far better, returning 1.1% for the month. We took this opportunity to lock in some profits, and lowered our investment across the board in the sector, bringing total Consumer Discretionary holdings down from 16% to 12%. We sold positions in Homebuilders and Specialty Retailers, although these two industries continue to make up the bulk of our holdings here. We will continue to look for opportunities in this sector as the holiday season approaches, and may increase our investment allocation here going forward. By Style: Growth stocks Dominate Last month’s trend continues, as our portfolio shifts Value Core Growth towards growth names. As of the end of September, the scales have tipped to just over 50% growth names in the portfolio, up from 43% last month. This shift has two drivers: One, as the economy continues Large 1.6 0.6 3.5 to strengthen, growth stocks offer the opportunity to benefit from that strength. Two, many holdings that were formerly value stocks have “crossed over”, meaning that the market has recognized their intrinsic Mid 10.8 3.6 19.2 value, and driven them into growth territory. Small cap stocks continue to provide the best possible return for your investment dollar. The niche Small 22.2 10.0 28.4 sectors that many small caps operate in will likely show the most robust growth over the coming months. Our portfolio continues to be weighted heavily toward small caps, as they account for just over 60% of the total portfolio. Focus on: Healthcare We have increased our investment in Healthcare stocks, which now make up the second biggest sector allocation behind Information Technology. We have been adding Biotech names as growth opportunities and equipment/service providers as value stocks. For Biotech, the key is waiting until the drug has proven to be effective. Sure there are breath- taking gains to be made early on, but since not even Nobel prize winning scientists can predict the outcome of a clinical trial, investing before efficacy is proven is very speculative and should only be undertaken as part of broadly diversified portfolio. Proving a drug to be effective is a great achievement, but there are still significant hurdles to overcome and thus still significant upside potential. Biotechs at this stage in their development have great earnings growth potential if can gain regulatory approval, manufacture the drug on a commercial scale, and build a sales force. We’ve added several small cap Biotechs to our portfolio, in addition to beefing up our positions in some of the major players in the field. Many healthcare equipment/service providers are well-poised to benefit from the aging of America. For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 4. Providers of medical services such as hospital management and supplies will have increased opportunity to grow as the baby boomers reach retirement. Companies in these segments with good cost structure and solid distribution channels are worth taking a look at. Here is a selection of some Healthcare stocks we have been buying recently. Click on any of the ticker symbols below to get details on trading activity. For most of these stocks, we’re looking at a minimum of a 6-12 month investment horizon. Ticker Company Price (9/26) Industry Comments AXYX Axonyx $4.55 Biotech Small cap Biotech play BDY Bradley Pharm. $25.00 Pharma Great earnings growth; taken some profits but continue to hold a large position CERS Cerus Group $4.73 Supplies Small cap medical products company focusing on blood transfusion. EPIX Epix Medical $15.72 Equipment Small cap medical products company focusing on improving MRI technology. FRX Forest Labs $50.70 Pharma Good valuation; strong earnings, lots of cash, no debt. GILD Gilead Sciences $55.42 Biotech Great earnings growth; taken some profits but continue to hold a large position PLMD Polymedica $52.10 Supplies Solid fundamentals, lower than average P/E (16x); currently we hold small position and are adding to it. SEPR Sepracor $28.20 Biotech Pharma sales continue to show strong growth THC Tenet Healthcare $14.64 Facilities Owns & operates hospitals nationwide. XOMA XOMA Ltd. $7.36 Biotech Revenue growth strong and company just started booking profits. Bradley Pharmaceuticals (BDY) is currently our largest position in the portfolio. Given that there are ������� ������ ����� ����� ������� 2,400 positions, that is quite an accomplishment. �� Bradley has made the “top 10 holdings” list multiple �� times over the past two years, and during that �� time, we have increased our position in Bradley �� ��� ���� ��� ��� ��� Pharmaceuticals 10-fold. The stock has risen from �� ��� ��� the $10 range a year ago to over $35 currently. The �� chart below shows the stock’s price history, with � the green arrows indicating when we increased our �� � �� � �� �� �� � �� � �� � �� � �� �� �� � �� � �� � �� � �� �� �� � � � � � � � � �� �� �� �� �� �� �� �� �� �� �� �� �� �� position, and the red arrows indicating when we took profits. m100 buys and sells of BDY For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 5. Our purchases earlier this year are paying off handsomely as Bradley’s solid product line and nice sales & earnings growth trends are recognized by the market. We think there’s still more to come for Bradley, and have an investment horizon of at least 12 months. Focus on: Telecom Telecom appears at first to be a small part of our portfolio, weighing in at 3.8%. However, there are also a large number of Telecom Equipment providers that are classified within the Information Technology sector. When taken together, our total Telecom investment is close to 10%. Many Telecom stocks have had quite an impressive run in the last 12 months, some increasing several hundred percent. But, many of these stocks were seriously oversold, and the appreciation in value is warranted. The telecom equipment providers are benefiting as capital spending finally picks up after 4 very lean years. Those with a low cost structure and solid balance sheet will see the increased revenues drop quickly to the bottom line. In addition to evaluating the financial strength of the companies, we are looking at the quality of their technology. There are still too many players on the field right now and financial strength & technology will determine who survives. The table below outlines the stocks we are currently buying in the Telecom sector. We hold significant positions in Lucent, Interdigit, AT&T Wireless, and Western Wireless. We hold small, but growing positions in Level 3, Superconductor Technologies, and Hellenic Telecom. Ticker Company Price Comments AWE AT&T Wireless $8.25 Leader in wireless industry; recently returned to profitability. IDCC Interdigit Comm. $15.50 Supplier to wireless industry, forward P/E of 5.9X; good longer-term prospects. LVLT Level 3 Comm, $5.40 Strong revenue, focus in key market (Voice over IP); recent sell-off on bad news provided entry opportunity. LU Lucent $2.25 Beaten-down supplier still has solid future. SCON Superconductor $4.12 Well positioned wireless industry supplier; Technologies strong revenue growth; on the cusp of profitability, low debt. OTE Hellenic Telecom $5.43 Integrated service provider in Greece; we expect strong sales growth. WWCA Western Wireless $18.13 Wireless provider in growing rural market. Info Tech Focus Update Last month we featured several Info Tech companies that we were adding to the portfolio. Each month, we will update you on buys featured in the previous market outlook, and let you know if we are still buyers, or have sold off the stocks mentioned. We continue to hold most of the positions listed in last month’s Market Outlook, and have added to some, as well. To see updates on these For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 6. and other stocks more frequently, click on one of the ticker symbols below, which takes you to our Stock Info page. Subscribers to our m100 Journal can also view the m100 trading activity on any stocks, including those below. To sign up for a free 30-day trial, click here. Ticker Company Sep. Return Comments COVD Covad Comm +52% We’ve added to this position during September, and just recently sold a portion of our holdings to lock in gains. EGOV NIC Inc. +50% We continue to hold a small position. FMKT Freemarkets, Inc. -9% We continue to hold a small position. NENG Network Engines +12% We sold most of our position during Sep. ORCL Oracle -11% We added to our position during Sep. RFMD RF Microdevices +3% We continue to hold a significant position. RNDC Raindance -7% We sold most of our position during Sep. SONE S1 Corp +1% We sold most of our position during Sep. SONS Sonus Networks -2% We continue to hold a significant position. SUNW Sun Microsystems +1% We continue to hold a significant position. Wrap up: Learn your Investment Strengths As with all useful skills, investment skills have to be practiced before they can be mastered. Unfortunately most people practice their investing skills with money they need to fund retirements, homes, college tuitions, etc. Practicing your investing skills with money that you need makes as much sense as attempting to fly solo before taking flying lessons, and perhaps is just as dangerous. A better way to practice your investment skills is to manage a model portfolio so you can try your hand without putting your financial life at risk. Our website www.marketocracy.com can help you do just that. Membership is free and enables you to set up as many as 10 model portfolios each of which starts out with $1 million virtual dollars. You decide which stocks to trade, when to trade, and what price to pay. Our software keeps track of your decisions and calculates a daily net-asset-value (NAV) for your model portfolio the same way that all mutual funds do so you can compare your performance with that of any mutual fund or market index. The ability to compare your performance to an Learning what areas of the appropriate benchmark is critical to identifying market play to your strengths and one’s investing strengths and weaknesses. Few people are good at investing in all industry which don’t is one of the keys to sectors so don’t be alarmed if your stock picks improving performance. on the whole do not outperform a broad market index. The real lessons require a deeper look. If, for example, your portfolio consists of mostly technology stocks, it makes more sense to compare your results to an index of technology stocks rather than an index of all stocks. If your results compare favorably to a technology index, you can reasonably consider the technology For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 7. sector to be one of your investing strengths. Identifying your weaknesses is just as important. After all, its awfully hard to improve at anything if you don’t know what you are doing wrong. The Standard & Poor’s Corporation publishes benchmark indices for 10 industries: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecommunications Services, and Utilities. Knowing which of these industries are strengths and which are weaknesses is a good place to start to improve as an investor. It is also useful to identify strengths and weaknesses Value Core Growth by investment style. The Morningstar style box shown here consisting of 9 investment styles is a good framework for analysis because there is a good Large benchmark index for each of the 9 styles to use for comparison. Styles are typically classified along 2 attributes: Mid the stock’s market capitalization and the stock’s fundamental strengths. First classify your stocks as being either small, mid, or large in terms of their market capitalization. Then, look at their earnings Small and sales growth, as well as other fundamental financial data to identify growth, value and core (basically a blend of growth and value.) Investors have strengths and weaknesses. Learning what areas of the market play to your strengths and which don’t is one of the keys to improving performance. Once you know your strengths and weaknesses, one strategy for improving your overall returns is simply to weight your portfolio more toward your strengths and away from your weaknesses. Your overall returns should improve simply because you will make fewer mistakes. Next month we’ll look at how you can use the knowledge of your investing strengths and weaknesses to improve your overall results even more by collaborating with others. For more information on Marketocracy’s offerings, click on one of the links below: Masters 100 Fund (MOFQX) m100 Journal Stock Alerts Forums Login Page
  • 8. This PDF file may be freely distributed to others, or placed on your own website with our compliments. If you put this file on a website, please email the URL of the web page to: references@marketocracy.com want more info? Marketocracy Data Services has recruited over 50,000 people, from every state and more than 75 countries, to manage 60,000 model stock portfolios at www.marketocracy.com. For nearly 3 years, we’ve been monitoring their virtual trading activity- tracking 10,000 stock positions and over 3.5 million trades. We generate research and analysis based on our best investors, and offer the information in multiple products. See below for more details. Mutual Funds - For more information on Marketocracy Funds, click here The m100 - The m100 are our top 100 investors at any given moment. Learn more about who these top investors are and how you can benefit from their expertise. Stock Alerts - We analyze the trading activity of all of the members of our site, determining which stocks are being bought by the best, and sold by the rest. The strongest candidates are published in our Stock Alerts report. m100 Research Reports - Here you’ll find PDF research reports cover- ing specific stocks, industries, and even profiles of m100 member port- folios and strategies. Stock Info - More than just a stock quote, you can use the Stock Info page to find out whether your favorite stocks are held by the best or the rest. We show you the trading and holding activity of our best and worst investors on any stock. Now you’ll know exactly who is buying and selling, so you can follow the best. Library - Our library contains free articles including profiles of our top m100 members, the m100’s monthly market outlook, and various in- vestment basics topics. Take a look also at the investing insights articles written by our top m100 members, each detailing strategies and analy- ses used by our top members. Forums - Take a look at the investment discussions taking place on our forums. Only top ranked members may post, so you know that you are listening to investors with proven track records.

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