I am so tired of the usual Internet stocks.
I’ve been covering Internet stocks for about a decade now. In 1998, I sold my Web-services business to a publicly traded company for all stock, forcing me to get a crash course in the Internet stocks out there (and how to hedge them). Then, when I was a managing partner at a venture capital firm during the tail end of the boom and the beginning of the bust, I saw the tide come in on the entire industry and saw which types of stocks would prove to be the eventual winners.
Now I see the same thing happening again. Regardless of the direction of the stock market, the Internet is a trend that is never going away. Every day, our computers need to store more data, our old coaxial lines need to transmit digital data, our biggest advertisers need to find more-creative ways to market their products, and so on and so on.
So let's find the unloved beasts that will make this all happen. The ones that are all set right now to double in this market.
One thing: It's never possible to make a huge amount of money on the stocks everyone else is talking about. Whatever the stock of the day is. Sure, we can argue about Google (GOOG) or Baidu (BIDU) or Sohu.com (SOHU) all day long. Eventually, Google will be a $1,000 stock, but that day might be 10 years out. And Yahoo! (YHOO) might get bought for $33, or it might flounder here at $20. I think both of these businesses have a lot of value, but it's hard for me to game the 10,000 other investors who talk about these stocks on a daily basis.
Let's find the stocks that have been unloved, forgotten, beaten down -- and yet are cheap in the Ben Graham or Warren Buffett sense, the stocks that hedge funds are starting to accumulate. These are the stocks that I think will double within the next year:
First off we have Harmonic (HLIT). Harmonic helps old-school cable companies, phone companies and the like turn into digital behemoths. It sets up the whole digital infrastructure, allowing old lines to transmit data (such as on-demand movies), dealing with all the server issues, new customer issues, broadband data issues and so on.
Let's look at the basic facts: The company has a $735 million market cap, $288 million in cash and no debt. Almost half the market cap is in cash. This company will never go out of business unless it starts burning a ton of money. Is that possible?
Well, cash flows the last 12 months were at $61 million. If you back out Harmonic's cash, that puts its enterprise-value-over-cash-flows ratio at just 7.5. That means Harmonic has a cash flow yield of almost 14%, with analysts expecting earnings to remain flat over the next year or so.
Meanwhile, the company does have revenue growth of 16%. The stock moved down recently when Harmonic guided revenues from $362 million (what the analysts expected) to $356 million. Not a big deal, but the stock got crushed. The CEO has a record of guiding conservatively, and I expect the same here. Even if it's not a double, it’s a safe bet to get solid returns at this point, even in a difficult environment, because of how badly beaten down the stock is.
Next: ValueClick (VCLK). This was the darling when all the online agencies, such as Aquantive and Doubleclick, were getting snapped up by the likes of Microsoft (MSFT) and Google (GOOG0. But then the big guys left ValueClick behind, and slowly the stock has collapsed to the point it's at now: dirt cheap.
Every advertiser is moving budgets online. They have to. They need to justify their expenditures in a difficult environment. The Internet’s the way to do it. And advertising on ValueClick’s ad networks and using its measurement tools to judge success is the way to monetize those ad budgets.
ValueClick has a forward P/E of 13 (dirt cheap), $168 million in cash and no debt and a market cap of just $1 billion. It trades at just six times cash flows. To top if off, the chairman of the company just bought $1 million worth of stock for himself, and the company has beaten analyst estimates for four quarters in a row. All this market has to do is tick up slightly, and ValueClick is a solid double.
Next up is QLogic (QLGC). QLogic provides various chips, services and devices to aid in the management of data storage. We all know the cons: In a recession, IT departments are going to cut spending. Also, storage solutions are getting cheaper and cheaper. Fine. All of this is baked into the stock and then some, and I’m not the only one who believes this. Renaissance Technologies, one of my favorite hedge funds to piggyback, is also a large shareholder of QLogic.
The company has $366 million in cash and no debt. It's beaten estimates for the past four quarters in a row, and it trades for just nine times cash flows. Who are QLogic's customers? Well, Cisco (CSCO), Dell (DELL), Hewlett-Packard (HPQ), NetApp (NTAP) and just about every other major powerhouse out there.
Next week I’ll have some more dirt-cheap Internet stocks. This week's stocks are all solid value plays in growth industries. The best of every world.
A note from James Altucher:
Every weekend I send an email to Jim Cramer and several hedge fund managers about the most interesting portfolios posted on Stockpickr that week. Usually those portfolios not only list stocks according to a theme but also offer significant analysis as to why the stocks are cheap.
Here are some examples:
Stocks related to drilling the Marcellus Shale
Microcaps trading for less than tangible book
Stocks that do well after Hurricanes
Here's the challenge: Build a portfolio at Stockpickr.com with great analysis, and send me the link. Each great portfolio (with analysis) will get posted on TheStreet.com with your byline (as a "Stockpickr Guest Columnist") and will be included in my email I send to Jim and the other
hedge fund managers on my list.
At the time of publication, James Altucher had no positions in stocks mentioned.
Posted on Aug 5., 2008
