Marketocracy: A Virtual Value
08/26/2005 12:00 am EST
For investor education and the chance to "test drive" one's strategy, Marketocracy offers a fascinating Web site that allows investors to create and monitor virtual portfolios. In addition, Ken Kam then derives top stock picks by assessing the top stock pickers in this universe.
"We believe that a lot of the fears that have been holding back the market are really overblown. The stocks we’re looking at are doing very well, earnings are growing rapidly, and the stock market really hasn’t recognized that yet. In fact, it’s been like that almost for a year now, ever since the Fed started raising interest rates. Things that have done well as long-term interest rates have stayed low are going to face some trouble if they are not able to produce good earnings growth when interest rates start to rise. So at least through year-end, we think it’s time to start looking at growth stocks again. By the time we get to 2006, I think you’ll want to have made the transition from value stocks to growth stocks.
"One thing that has snuck up on us in the computer sector over the last decade is the importance of graphics and the amount of computers and boxes sold specifically for video games. Over the last few years almost all the other competitors have disappeared. Nvidia (NVDA NASDAQ) chips have been designed in to all the next generation Playstations and Nintendo boxes. The stock is not cheap. It’s trading at about 35 times earnings. If you are going to pay up by buying a stock with a higher p/e, then you need to make sure that the earnings growth will be there to support that valuation. Because this company has the design wins for at least the next generation of games, we think the earnings outlook appears good.
"Komag (KOMG NASDAQ) has the technology that allows people to put more and more information on a disk platter. They sell products that make disk drives hold more information. If you’ve noticed, more and more things now need disk drives – iPods, Tivos, etc. Over the years, there have been fewer and fewer companies who have kept up the technology and have been able to increase the capacity of drives. This company supplies all the major manufacturers of disk drives. And the stock is trading at a p/e of just 16.
"One of the things we’ve noticed about the computer business is that the companies that make the personal comptuers have not necessarily turned out to have a very good businesses. However, the people who make the peripherals have turned out to have very profitable business models. Along these lines, we particularly like Logitech (LOGI NASDAQ). The company has a consumer electronics strategy that is comparable to Apple's approach with its iPod. However, what we most like is that Logitech targets the Windows platform, which is far larger than Apple’s market.
"Our experience over the last five years has taught us that it is not always the technology company that captures all the value they can create, but the companies that are best able to implement the technology that reaps the rewards. Edgewater Technology (EDGW NASDAQ) is in the business of helping smaller companies implement technology to gain the same kind of competitive advantages. All of the insiders are buying stock in the company at current levels. It’s a very small company now. It’s growing by acquisition. Its market cap is only $54 million, and it has $32 million in cash on its books. So it would probably even pass Warren Buffett’s value screen, even though it’s a growth stock. And the ones who know it best – the corporate insiders – are buying."
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