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Kam: Investing in Catalysts
02/18/2005 12:00 am EST
"Successful investing is about picking the companies where there’s a catalyst that’s going to come to fruition in the near term that’s going to power growth," says Ken Kam. Here, he looks at some "event" stocks favored by the Masters 100.
"Our Marketocracy Web site monitors the trading activity of more than 60,000 virtual portfolios. I’d also add that when we see an opportunity where the ‘best investors’ on our Web site are buying aggressively in a sector that everyone else is selling, that is generally a good time to be a buyer. In other words, I feel most comfortable when I am on the same side of the trade as the people who over the long-term have shown me the best track record.
"I think this is a great time to be getting back into technology. Obviously, our fund is not limited to technology, and there have been times in the past where it was the biggest sector and times when it was the smallest. However, just this month, it’s gotten back to where it is now the second-biggest weighting in our Masters 100 portfolio. And within technology, we’ve been focusing on those companies where there’s a clear cut event, a near-term catalyst, that we think will both justify the current valuation and power it higher.
"The best investors in our system have increased their position in First Data Corp. (FDC NYSE) by 10%. That may not sound like a lot, but we are seeing a lot of the 'best investors' buying this stock. When I researched this, what I found was that the reason they like the stock is a new regulation called Check 21 that is changing the way that banks handle checks. In the process, it will require that many banks that do not accept electronic copies of checks will be forced to do that now. One of the biggest check processors is First Data, so they will probably be one of the biggest beneficiaries. That’s the catalyst we’re looking at to drive this stock forward.
"Over the last month, our best investors have also been accumulating Juniper Networks (JNPR NASDAQ), boosting their positions by 13%. Again, this is not a large percentage increase, but a big percentage of the people that I think are the best investors have been buying. What they are seeing here relates to the newer uses of the Internet, such as Voice over Internet Protocol. A lot of the excess capacity that was built up over the late 1990s has been used up, so now companies are starting to again build out Internet capacity. This former high flyer is one of the companies that has survived. And in the next build-out of the Internet, they should be one of the biggest beneficiaries.
"The top investors have increased their positions in Omivision Technologies (OVTI NASDAQ) by nearly 20%. The key event is the onging trend of putting cameras in cell phones. This company makes the chip that is used in most of the cell phones in order to take the picture. Over the years, the quality of cell phone cameras has gotten better and better. Just think of the raw numbers. There are approximately 800 million to a billion cell phones. Just the replacement of those phones will be a huge market for the chips made by this company.
"Palomar Medical Technologies (PMTI NASDAQ) is an interesting idea. While none of our investors are following this company, the holdings of those people who do have increased by 300% in the last month. That is a big vote of confidence. The company makes laser-based medical devices for cosmetic or elective surgery applications. I'd add that these devices for elective surgery do not require going through the FDA approval process. The main driver of their success in the past year has been a laser that’s used for removing tattoos. It’s a big market that has driven their stock price and attracted the attention of some of our best investors."
"Finally, I'd add that for the first time in probably ten years, you can consider the pharmaceutical industry to be value stocks. In 1998, the AMEX Pharmaceutical Index traded at 40 times earnings. The same index now trades at 14 times earnings. It’s also now trading at a lower valuation than then S&P 500. This is also an opportunity where the ‘best investors’ are buying aggressively in a sector that everyone else is selling. And they are buying the drug stocks in a big way. I think when the smoke clears, Pfizer (PFE NYSE) will be big winner. Nobody wants to touch any company that sells a Cox-2 Inhibitor. This was a $6 billion a year industry and one that had 90% gross margins and 40-50% net margins. If I had to bet on one, it would be Pfizer."
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