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ISN Ones to Watch 06/05/01
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TABLE of CONTENTS

1. General Sentiment
2. Weekly Model Portfolio Results
3. In the News
4. Technical Analysis
5. Changes to Model Portfolio
6. Comments Welcomed

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1. General Sentiment

I took a week off from some R&R with family and attempted to spend as much
time as possible away from the PC and the CNBC tape. It doesn't always work
out that as planned. The tech and Internet sectors suffered two down days at
the start of a holiday-shortened week and then recovered a little in the
following two days.

Near-term conclusion: Although volume was light, the two-day rebound, plus
the up day this past Monday, indicated that traders/investors appeared
relatively optimistic as the market heads into what is historically a slow
period for business for technology companies.

The damage from the first two sessions, however, couldn't be overcome in the
final two days. The major averages gave up some ground in the four-day
period with the Nasdaq Composite Index off 4.5%, the Dow 30, off a slight
0.4%, while the S&P 500 slipped 1.33%.

Soothing words over the weekend from Federal Reserve Chairman Alan Greenspan
about inflation not being a particular and some curious comments about oil
prices helped the markets extend their advance for a third straight session.

One remark Greenspan made was particularly interesting: The past three
recessions (73-74, 81-82, 90-91) have been preceded by a spike in crude oil
prices. The Fed chief, however, didn't discuss at length the impact of an
inverted yield curve. From a historical perspective, an inverted yield
curve - or a condition when short-term interest rates are higher than
long-term interest rates- has served as a reliable tool used by economists
to forecast a recession.

Readers who are unfamiliar with the term "inverted yield curve" can access
the Google.com search engine for an explanation. It's well worth the time.
In addition, by gaining an understanding of how the yield curve affects
stock prices, an investor can avoid a major downturn in the value of his or
her portfolio.


2. Weekly Model Portfolio Results

As was noted, last week's decline in tech and Internet stocks affected all
15 stocks in the Ones to Watch Model Portfolio - they all finished lower.

Xilinix (XLNX) - 8.1%
Broadcom (BRMC) - 14.2%
Commerce One (CMRC) - 18.8%
Nokia (NOK) - 9.1%
Corning Corp. (GLW) - 10.5%
CIENA Corp. (CIEN) - 8.2%
Finisar Corp. (FNSR) - 18.8%
Emulex Corp. (EMLX) - 13.7%
EMC Corp. (EMC) - 15.2%
Juniper Networks (JNPR) - 18%
Sun Microsystems (SUNW) - 18.8%
AOL Time-Warner (AOL) - 0.15%
Check Point Software (CHKP) - 10%
Efunds (EFDS) - 7.5%
Comverse Technology (CMVT) - 5.48%

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3. In the News

Notice how AOL Time-Warner hardly budged from the previous Friday, while the
other Model Portfolio components declined, on average, roughly 15%.

Some is written and discussed about AOL Time-Warner everyday in the
financial media that keeping up with the developments can amount to a
full-time job.

123jump.com writer Janet Evans Arnold provided a recent synopsis concerning
AOL Time-Warner's showdown with Microsoft Corp. (MSFT).

Here's the report: http://www.123jump.com/story.htm?story_id=11758

My take on the situation: Like any big company, AOL Time-Warner plays
hardball with the smaller players in its space, while going head-to-head
with its peers, such as Microsoft. In order to keep growing at a reasonable
rate at both the top line and bottom line, large companies continually make
deals with smaller fish as they seek ways to encroach on each other's
established turf.

While listening to the post-market commentary on CNBC concerning the
AOL-Microsoft browser squabble, I found one remark interesting: It's not so
much a battle for market share as it is more a battle for "mind share."

In other words, the slogan, "AOL Anywhere" means exactly that in describing
the Internet service provider's mission. As for Microsoft, it seems the
world's largest software company's mission is to have its software products
installed in any device run by electricity.

Meanwhile, Sun Microsystems continually pushes its Java programming language
as the standard for communication devices, which, in essence, is a PC's main
function now. Hardly a day goes without Sun publishing a press release
touting its latest deal with a vendor that agrees to implement Java as a
programming tool.

In some respects, this is a "tell" about how hard Sun and other software
applications companies are pushing to remain competitive against Microsoft.

The outcome?  Apple Computer (AAPL) is probably the best example of what
will eventually occur in the programming language/pervasive computing arena.
In many respects, although Apple makes PCs and laptops, it's a product unto
itself with its own way of doing things that sometimes comes in conflict
with the rest of the computing world.

In other words, the world will have to tolerate several different computing
standards the same way it has to tolerate the fact that not everyone speaks
a universal language. When it comes product preferences, some folks drive
Renaults, others drive Fords and then there's another group that prefers
Chevrolets.

It will probably always be this way despite attempts by men like Bill Gates
or Scott McNealy or Steve Case to manipulate people into thinking about
computers and/or the Internet in only one way - their way.

Although semiconductor companies - both producers and equipment makers -
continue to warn that the industry is facing more problems, Xilinix said
that its financial outlook for the fourth quarter remains unchanged.

That's the good news. The bad news is that revenues for the June quarter
will still show a decline of 15% to 25% sequentially.

Overall, Xilinx is saying its business is nearing a bottom is what is a
highly cyclical industry.

Nokia continues to capture market share from its rivals in the cellphone
market. According to research firm Gartner Dataquest, Nokia has increased
its world market share to 35.3% from 33.9% in the fourth quarter.

Nokia is also working behind the scenes to establish a wireless
infrastructure for 3G mobile phones. But so are its rivals.

Here again, we have a condition in which a large company does things its
way.

Check Point Software, the leader in firewall protection software, took a 10%
hit Monday after some obscure research outfit called Off The Record Research
last Friday claimed that Check Point was facing a significant sequential
slowing in revenue to price competition from rivals.

Interesting how a report shows up after the bell on a Friday from an
independent research firm and gets blown up all out of proportion.

But that's the stock market.

Comverse Technology reported first-quarter financial results Monday of 43
cents a share that was a penny better than the Street estimate. The stock
traded higher in extended hours, but not by an appreciable amount.

The Street's reaction was interesting to observe, considering the fact that
Comverse Tech, the leader in voice-messaging services, beat the consensus
estimate while setting a new record for year-over-year growth in revenues
and earnings 35% that were in line with its five-year growth rate.


4. Technical Analysis

Although it may be considered as a consolation prize in the same way a
contestant in a beauty contest wins the "Miss Congeniality" award, all 15
stocks in the Model Portfolio finished the week ending June 1 above their
52-week lows. Most of the lows occurred between April 3-6 when the Nasdaq
marketplace hit absolute (we hope) bottom.

AOL Time-Warner remains above its 200-day moving average, a good technical
sign, but the other components have slipped a little in the past 2 weeks.


5. Changes to the Model Portfolio

While surfing the Net for financial tid bits, I came across this heading:
"Oracle goes after Ariba, Commerce One with new software."

I've already dropped B2B software platform provider Ariba (ARBA) from the
Model Portfolio and replaced it with Nokia. Web hosting services firm Exodus
Communications (EXDS) was dropped in favor or small-cap player Efunds, a
recent spin-off from Deluxe Corp. (DLX).

Oracle is the world's No. 2 business software maker behind Germany's SAP AG
(SAP). Like any corporate giant, it's under pressure to shore up its top
line and bottom line during tough times. One strategy large companies employ
during difficult times is to enter new markets, which was meat of the story
concerning Oracle's thrust into the B2B procurement space supposedly
dominated by Ariba and Commerce One (CMRC).

The outcome? In the short-term, it means pricing pressure when a new
competitor enters the ring. Ariba and Commerce One are already facing hard
times since it's become apparent that large businesses are its chief sources
of revenue. Implementing this software is expensive for middle-sized and
small businesses. Procurement can be still be achieved by such arcane
technologies as fax machines and telephones.

So it's out with Commerce One, the other major B2B player in this space.

Its replacement, believe it or not, is 1-800-Flowers.com (FLWS), an
e-retailer that sells - you guessed it - floral arrangements over the
Internet.

The company is actually a "multi-channel" retailer; it provides access for
its flowers and gifts via the Internet, telephone, catalogs and boring
bricks & mortar locations.

1-800-Flowers.com does have competition from FTD.com (EFTD). In fact, both
companies went public at roughly the same time in September 1999. Both are
still trading below their IPO prices and both stocks have similar charts.

There are several positions for switching positions:

-Low price to sales ratio of 1.45 for the trailing 12 months
-Low debt-to-asset ratio of 0.15
-$84 million in cash
-Rising sales and falling costs
-Rising profit margins
-The company expects EBITDA (earnings before interest taxes depreciation and
amortization), cash flow in other words, to be positive in the current
quarter that ends in July.

There are some caveats:
-Flower sales is a seasonal business. The company's best quarter is the
fourth quarter that ends in April and includes Valentine's Day and Easter.
-Company is still burning cash. Profitability is still a conjecture.
-It has competition from FTD.com.
-The slowdown in the U.S. economy, including worker layoffs, could
eventually affect retail sales in the second half of 2001.

More pluses, however:

-More participation from institutions (mutual funds, pension funds,
insurance companies, bank trusts) compared to FTD.com.
-More than just flowers. FLWS sells gifts such as foods and gardening
equipment after a recent acquisition of catalog company Plow and Hearth.
-Despite the fact that insiders own 81% of the outstanding shares, there has
been little insider selling in the past 6 months. Means insiders are patient
with the company.
-Good chart pattern. The 50-day simple moving average line crossed the
200-day moving average line.
-What's interesting to observe is when the moving average lines crossed (a
technically bullish indicator) it was in mid-February. The was the exact
time when the Nasdaq Composite Index and the Nasdaq 100 Index both went into
a precipitous tailspin that eventually exhausted itself on April 3-4.

A diversified portfolio can be diversified in several ways.  One way is a
concentration in large-cap stocks that cover several industry groups.
Another way is to divide the capital into large-cap, mid-cap and small-cap
holdings.

Wall Street at the present time is showing little interest in large-cap
stocks. I've outlined a few of reasons in this newsletter. But all of the
money hasn't taken flight to the safety of bonds in the past few months. A
considerable portion has drifted toward small-cap stocks.

Let the trend be your friend.


6. Comments Welcomed

A resident of Wilmington, NC, Dave Jennings writes the Market Highlights
report for 123jump.com. He can be reached at djennings@ec.rr.com.


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INTERNET STOCK NEWS (ISN) ? 2001

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