| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
Small Caps with Big Ideas There are plenty, and more are popping up Just think of your hard-earned money winging its way to small companies far, far away. It's a bit scary. So for investors in international small-cap stocks, it's a good idea to keep things simple and follow the sharks--big companies that are gorging on growth and setting market records. Nokia Corp. (NOK) is a prime example. Its wireless telephony is a worldwide rage that has powered it to a $200 billion market value. The trick, then, is to find the wireless minnows swimming in Nokia's wake. Europe is full of them. Some make memory chips and plastic covers for cell phones; others design tiny, phone-friendly Web pages. All are hunting for niches in a cell-phone industry that exploded from 300 million to 450 million customers in 1999 alone--and shows no sign of slowing down. And unlike their Internet or software peers, cell-phone companies are often ahead of U.S. rivals, meaning that many will either grow or get bought. Already, Europe's small-cap telecom players have caught investors' attention. Still, other exciting prospects are popping up all over the place. Consider France's Wavecom. The $45 million company, which went public in June, 1999, makes a product called the Wismo. This is the guts of an ordinary cell phone, consisting of computer chips and radio technology. Over the next three years, the cell-phone market is expected to double. The wrinkle for Wismo is that most of the new buyers will be in developing countries. Result: They will be looking to buy low-priced, generic models--in essence, plastic casing around a commodity Wismo. Wavecom has alluring prospects outside the phone market, too. In the age of the mobile Internet, all kinds of machines will need bare-bones radios like the Wismo. With it, vending machines, for example, can call suppliers when they're running low on sodas. Cars will be able to report their locations if stolen. And in a couple of years, a portable computer without a cellular link to the Internet will be as outmoded as an off-line PC. ''Machines will all be talking to each other,'' says Wavecom Chief Executive Michel Alard. In December, Panasonic ordered an undisclosed number of Wismos for its new notebook computers. Wavecom shares doubled, to $60, so it might be worth waiting for a hiccup in the stock. There are plenty of other mobile prospects to watch. Perlos Ltd., a Finnish subcontractor with 1999 sales of about $280 million, makes the plastic casing for more than half of Nokia's cell phones. That business is growing at 60% a year and has operating margins of 27%. The company, which went public in 1999 at $11.30 a share, is still hovering around $25. While that is impressive by most standards, Perlos trails behind the performance of other wireless stocks. To be sure, Europe's burgeoning new small-cap markets--Germany's Neuer Markt, France's Nouveau Marche, and even Italy's Nuovo Mercado--are bursting with Internet fever. With them the reigning theme is that Europe's Net represents a new frontier for portals and e-merchants. Maybe that will turn out to be the case. But with Europe's consumer markets still walled off by language and cultural differences, there's quite a risk that the growth of e-biz could turn out to be a lot slower than the exponential growth seen in the U.S. Still, there's a lot to go for. One way to play the Europe-wide Net already, say analysts, is to invest in Web consultants that are selling services all over the Continent. For example, Stockholm's Icon Media-lab (ICON), with offices around Europe, has seen its stock multiply eightfold this year--despite losses as it starts up and acquires new operations. Its appeal? It's paving the way for business-to-business e-commerce in Europe, which is expected to boom. Pierre Lamboray, fund manager for Dexia Equities B Europe Small Cap fund, which rose 45% in the first 11 months of 1999, is holding on to Icon. A similar play is Sweden's Framtidsfabriken, a consulting firm that helps companies buy and sell on the Web. Although Framfab has soared tenfold since its initial public offering in June, driving its market cap above $2 billion, Lamboray is sticking with it. ''If you sold all the stocks when they get over $1 billion,'' he says, ''you'd be left with only bad ones.'' When it comes to the mobile Internet, though, Japanese companies are leaders of the pack. Tokyo's Hikari Tsushin, for example, has a booming business selling cell-phone subscriptions in Japan. All the while, though, it is building a huge database of customers' names and addresses, along with their credit status and phone numbers. All that data could prove to be a gold mine--by providing an entree for Hikari into mobile e-commerce. The stock multiplied fivefold in the first 10 months of 1999, but faded late in the year, making it a possible buying opportunity, say analysts. ''It's very aggressive and has a well-managed business model,'' says Ian Macdonald, fund manager for Rowe Price-Fleming International in Tokyo. Meanwhile, Trend Micro, a Taiwanese company traded in Tokyo, offers investors a play on digital convergence. In the coming year, consumers will increasingly be networking appliances by, for example, connecting the digital camera to the TV set, or controlling the home thermostat or VCR by cell phone. Neat, but potentially dangerous, because the risk of viruses skyrockets. Trend Micro's answer: Comb through networks to hunt down viruses. The company, which has alliances to develop software for Compaq Computer Corp. (CPQ) and MCI WorldCom Inc. (WCOM), reported earnings of $7.8 million in the six months to Sept. 30, a year-to-year gain of 179%. ''I expect to be making money on that stock for five years,'' says David Scott, fund manager for Jardine Fleming Investment Trust. And for those feeling overexposed in tech stocks? They might consider, then, turning a profit from Swiss chompers. Switzerland's Straumann makes tooth implants that last three times as long as a traditional bridge. This would appear to slow down repeat buyers, but Straumann's $64 million sales are growing at a 30% clip, with operating margins of 22%, says Lorenz Reinhard, fund manager at Julius Baer Asset Management. Shares of Brazilian steelmaker Usiminas, one of the country's first companies to be privatized a decade ago, have doubled in price since April. But Raphael Biderman, steel analyst with Robert Fleming Securities in Sao Paulo, says Usiminas should benefit even more from rising prices and the economic recovery. Consider, too, Finland's Nokian Tyres, spun off from Nokia five years ago. Sales, which reached $323 million in 1999, are growing at nearly 30% a year, while analysts project earnings growth to top 20% during the next three years. The volatility of small-cap stocks deters many investors. But the stupendous recent performance of high-tech issues is making many reconsider. Stocks such as Nokian and Straumann show that selective investors can find plenty of potential without having to suffer the fevers and swoons of Net stocks. By STEPHEN BAKER With Sharon Reier in Paris and Miki Tanikawa in Tokyo _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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