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1997 was both a blissful and a painful year for the Lai Fund. In October 1997, the stocks in the Lai Fund had exploded year-to-date, and the portfolio was decimating the returns of the Dow Jones Industrial
Average and the Nasdaq Composite Index. But then the stock market dropped 554 on one sad day in late October, and the biggest holdings in the Lai Fund haven't recovered since then. From their highs, the largest holdings
of the Lai Fund have plummeted (Iomega from 16.5 to 12.5, Rainforest Cafe from 38 to 33, and Intel from 105 to 70). Furthermore, the Lai Fund's hot picks for the second half of the year totally sucked. Ascend dropped
from 50 to 24, Seagate dropped from 36 to 19, MetaCreations dropped from 19.5 to 11, and PetCo dropped from 31 to 24. Horrible!
The 3-day rally closing out the year eased the pain of the drop from the October
top. The Lai Fund still made good money for the whole year, and for the most part, the opinions that I posted in the Half-Year Report on 6/30/97 were validated (the notable exception is my recommendation of ASND). I am optimistic about the Lai Fund holdings for 1998, even though I think the U.S. stock markets are generally overpriced. Following are my opinions on certain companies (and their stocks):
Amazon 60 1/4
I think there may be biggie-drops in the stock prices of book companies, including Amazon, Borders Group and Barnes and Noble. Experts figure 25%+ growth in these companies, but I can't envision
25% growth in the book industry as a whole. For a brief time, these companies can grab market share from suckier book companies like Crown Books, but since these three increasingly define the book industry, pretty soon
they will be fighting for the same market share, especially on-line. I think both Borders and Barnes and Noble will have their on-line stores going full-force by the end of the year, with their physical stores acting as
a great marketing channel for their web sites. Furthermore, all three companies seem to have excellent management and business plans. I think the current valuation of Amazon presumes unequivocal growth and success of
the company over the next ten years.
Each human has a finite amount of free time to enjoy media of all sorts. Before there were books, TV, and movies. Now there are also web-surfing and computer and video games.
It has been my experience that web-surfing and computer and video games can be more captivating than most books, and I'm sure I'm not the only one who feels this way. Thus, just as Blockbuster and other video-rental
stores are doing crappy because there isn't much growth in the video-rental industry any more (because of market saturation and distractions like DirecTV, the Web, and computer games), I think there may very well be
disappointments in the growth of the book industry as well. I wouldn't be surprised if Amazon drops by more than 50% this year.
Ascend (ASND 24 1/2)
Ascend got slammolah-ed when their sales numbers turned soft
and they missed their quarterly numbers. I count this as one of my big mistakes of 1997 (buying at around 49 almost half a year ago) not because the company performed poorly, but because I didn't do enough research on
the company before buying it. I do know they sell networking equipment, but I couldn't even name one of their products! I wasn't sensitive to the risks that Ascend faces as they try to grow their sales against other
better-capitalized companies like Cisco and 3Com. I still don't understand the Ascend story very well, but I'll hold for now.
Cisco (CSCO 55 3/4) SPLIT 3 for 2
Coincidentally, I can't name a single product
that Cisco makes either! But since they are the biggest and baddest monkey in the networking equipment industry, my ignorance is less critical. Seems that Cisco spent about $700 million on R&D last year, so
I'm sure they can continue to bring to market the most relevant networking equipment. I think Cisco will continue to dominate the networking industry. Maybe even more and more so as time goes on. And they will enter
markets they have left untouched and eat other companies' babies with their aggressiveness (they are establishing intensified focus on the small-business and home office markets now).
CompUSA (CPU 31)
I got
this one wrong half a year ago. The Dell model of build-to-order was not so much a threat to CompUSA as I predicted, but an opportunity. CompUSA adopted the build-to-order model and introduced their own custom-made
computer line. Combined with continued domination of the retail computer store industry and ever-steady growth in number of stores, CompUSA went up about 50% in half a year. I expect them to continue to prosper, and I'm
holding my remaining shares.
E*Trade (EGRP 23)
Many competitors to E*Trade surfaced over the past year, but I think most people still regard E*Trade as the number one pure online brokerage. A lot of other
companies offer lower commission rates for online trading, but E*Trade still offers many great free services for account holders, including free research, portfolio tracking, access to briefing.com, etc. As long as
E*Trade remains committed to offering more value-added services to their customers and improving their web site, rather than just getting into the commissions price war, they should continue to grow and prosper.
Of all of the other online brokerages, I am most impressed by Ameritrade. Good marketing campaign and low commissions. While all of the online brokerages duke it out, the clear winner is the consumer. Now someone with
only $1,000 can start investing without getting eaten alive by commissions. This wasn't true five years ago.
Home Depot (HD 58 7/8) SPLIT 3 for 2
Those who have shopped at Home Depot know that it is here to
stay. For good. It is inconceivable for me to imagine a future ten years from now where Home Depot is not a whole lot bigger and a whole lot more profitable than it is today. I think this stock deserves a healthy
premium to its growth rate and the market P/E ratio, because it is just such a sure thing in the long term.
Iomega (IOM 12 7/16) SPLIT 2 for 1
The wild ups and downs of Iomega's stock price over the past three
years belie the strong, steady, and consistent growth in revenue and profits of this awesome company. Until Iomega commits a huge strategic gaffe, or until the market does not wholeheartedly accept its products,
Iomega will continue to be one of my favorite companies and stocks. The "brand" of Iomega is very strong now, and all the press it has received related to its stock's ups and downs has helped to build the
company's notoriety. I think the Zip drive is unbeatable right now as the future replacement for the high-density floppy drive, even though many competitors have introduced Zip-drive killers. The clik drive offers a
potentially huge future cash flow for Iomega, but absent the success of the clik, I think Iomega will still continue to prosper. At 12.5, Iomega is very fairly valued and offers good prospects for 25%-35% short-term AND
long-term annual appreciation.
MetaCreations (MCRE 11 1/8)
A risky stock to buy, but one that offers great potential return. While rudimentary 2D and 3D graphic tools are becoming a cheap commodity (go to
CompUSA and you will see many cheap programs for image editing, 3D graphics, etc), MetaCreations has the research and development resources to create true high-end innovations in the these fields. MetaCreations
continues to release a steady stream of new products and upgrades every quarter, and more than most other graphics tools companies, they are in position to profit from as-of-yet undeveloped markets in 3D (like
3D-navigable operating systems, 3D real-time applications for retail and medical equipment, etc.).
PetCo (PETC 24)
This stock got slammed when their latest-quarter earnings came in at $0.22, rather than the
consensus earnings estimate of $0.29. From a high of about 31, the stock dropped to less than 21. But the CEO of the company explained that the 7-cent shortfall was attributable to the losses of the companies that PetCo
acquired during the quarter. PetCo's own, pre-existing stores did generate the $0.29 that people expected. I still think PetCo offers awesome potential for simple-to-understand, long-term growth of 25% per year, maybe
even for the next ten years. There are only two main companies vying for national presence in the pet industry, PetCo and PETsMART. PetCo has performed much better than PETsMART, and I think its business model
(superstores smaller than PETsMART's massive warehouse-like stores) has a better chance of success in the pet industry. Pet supplies are very unglamorous, and pet stores have existed for over one hundred years. So after
all these decades, PetCo is undergoing the effort to consolidate the industry across the country. If they succeed, then they will enjoy all the benefits of dominating their industry that other retailers like Home Depot,
Price CostCo, and Walmart enjoy. If they become the biggest and the best in the retail pet industry, they will control the distribution channels, demand the best deals from their vendors, and reduce the general and
administrative costs of operating any individual store to a minimum. I think if any company will enjoy this success, it will be PetCo. The PetCo story is about growth in market share and consolidation in a
stagnant-growth industry.
Rainforest Cafe (RAIN 33)
RAIN continues to be one of my favorite investments. At current levels, you can still count on doubling your money in three years or sooner if RAIN
executes its business plan successfully. RAIN is in the process of raising more $100 million in convertible debt, so that it can grow as quickly as planned. It seems that other companies are producing or considering
knock-off restaurants similar to RAIN's, and the best way to undermine the competitors' efforts is to maintain quick, steady growth into new markets over the next few years. The main threat to RAIN is the fad-effect,
with people getting bored with RAIN after the initial novelty wears off. I doubt this will happen, considering that same-store sales in their oldest unit in Minnesota continues to rise every year.
Seagate (SEG 19 1/4)
I was too impatient when I bought this stock around 37 and 40 before it got slammed all the way down to 19. I still have a favorable feeling about Seagate, but nowhere the level of optimism I
felt for it three months ago. I should have realized that the Seagate's advantages were internal (good management, good R&D developments, etc), and not external (brand name doesn't mean that much if competitors have
cheaper, faster, more reliable drives, disk drive industry as a whole had oversupply and was very vulnerable, rapid drop in prices, etc). Seagate will have to manage its way out of misery, but I have faith in them to do
so. At 19 1/4, Seagate seems like a good hold to me. But not a buy. I'd rather buy a steady-growth company that dominates its industry, like Cisco or Iomega. |
