Riding the Waves
10/08/2004 12:00 am EST
Toby Smith finds his investment ideas by seeking "transformational change" and isolating the best stocks to benefit from these important trends. Here, he looks at some favorite emerging markets such as WiMax, natural gas, VoIP, electronic health care and RFID.
"We started ChangeWave Research with three basic ideas. Number one is that transformational change is the great wealth-creating and wealth-destroying event in commerce. Our business is about real, transformational change— not incremental change. Number two, our idea was that if we built an intelligence gathering network throughout the world, we would find these long-term secular shifts that we can then invest in. What we’ve learned over the years is that doing research takes more than just one guy sitting behind a computer.
"We have a group of some 4,800 people throughout the world, and we ask them to be our eyes and ears. They are professionals in about 200 different industries. It’s a variety. We are agnostic about any one industry. Perhaps 65% of them are in some form of information technology. Many are physicians and scientists. Some are salespeople. Our 'eyes and ears' are now in about 25 countries looking for these trends. Third, we believe in growth investing in sync with the business cycle and we use our research group to track the economy. Here are some of our favorite waves that we are riding right now.
"One of the waves we are riding is WiMax. Our favorite company there is Alvarion (ALVR NASDAQ). Intel has already announced that they will put a WiMax chip on their notebook computers starting next year. This will let you get high-speed wireless access without the need for a direct DSL connection. Where the biggest growth is going to be is in Russia, and Brazil, India, and Africa, where they don’t have the money to build a broadband infrastructure. Intel is behind the WiMax standard, which is a big deal. And Alvarion is a pure play in this industry.
"Another wave we like is natural gas. We have reached an inflection point between supply and demand and should now experience stronger demand and rising prices. We’re looking for companies that can grow their reserves 10% or more a year and that are finding gas with the drill bit - not just by acquiring other exploration companies. We also look for companies with 6 to 7 years of inventory of drillable sites. Gasco Energy (GASE OTC Bulletin Board) is an aggressive growth stock. We can buy this company for about 3 cents per thousand cubic feet of gas compared to some recent acquisitions in the industry at 50 cents. The company is increasing production about 25% per quarter. They have 18 wells and will have 52 by the end of next year.
"Another big wave we are riding is Voice over Internet Protocol (VoIP). This is simply Internet-based telephone service. About six months ago, we saw the demand curve turning up. This wave is going from about 500,000 users to 27 million in the next four years. That’s a rather steep curve, and we expect to be riding that wave for the next few years. One VoIP play is Sonus (SONS NASDAQ), which makes the soft switches needed for this technology. As a long-term proposition, this is the purest play in the industry. We are also looking at AudioCodes (AUDC NASDAQ). They own the codex – the intellectual property that allows you to put a small card in a box that handles 50,000 phone lines for about $5,000. Our most speculative stock in this area is 8X8 (EGHT NASDAQ). With their service, you can now buy unlimited worldwide monthly Internet telephone service. If you have relatives living around the world, a half hour phone call could cost that amount. They also offer live streaming video with TV quality. We caution that with speculative stocks like 8X8, you should not judge performance quarter by quarter, but rather over several years.
"Electronic health care has become a big change wave. The catalyst was when the FDA came out and said that they would force the physicians, hospitals, and pharmaceutical firms to have electronic records. This e-health initiative is being mandated by the FDA and will happen no matter who wins the election. We’ve loaded up on Merge (MRGE NASDAQ). The company provides the software for electronic digital X-rays. You’ve seen the huge stacks of files at the doctor’s office; it’s an expensive and unproductive way to store these records. Merge is providing the software to create electronic X-rays to replace old X-rays. My favorite play in e-healthcare is E-Research (ERES NASDAQ). They have automated the clinical trial process for drug development. They are the worldwide leader, with a virtual monopoly. As more biotech and pharmaceutical companies develop drugs, this firm will help them meet the FDA’s requirements. For the next three years, the current backlog alone will allow ERES to grow 70%- 80% a year with very high margins.
"We’re also playing the radio frequency identification (RFID) wave, which is a small electronic bar code-type device that can be attached to products to electronically track shipments of goods. Both Wal-Mart and the Department of Defense mandated that all suppliers that they do business with are going to have to put these devices in their inventory system. Our play on this wave is Unova (UNA NYSE), which is the purest play in the industry. This is a huge technology development. If you own a retail business, you know that one of the biggest costs you have is theft. RFID automatically tracks things and registers their movement. This is a company that will grow perhaps 200% over the next two years as this RFID wave takes off."
At worst the tax cuts will validate current market valuations, says Tom Essaye. At best they’l...