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INTERNET STOCK NEWS [tm]
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ISN Ones to Watch 1/7/2002: Fads Versus Value
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TABLE OF CONTENTS

1. Overall Sentiment
2. Observations
3. Weekly Portfolio Results
4. More $10 Temptations
5. Sonny T. Returns From Japan
6. IBD Retail Leaders
7. Comment Welcomed

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1. Overall Sentiment

The major indexes gained in the holiday-shortened week of
Dec. 31-Jan. 4. The first three days of 2002 were plus
sessions. If the so-called January Barometer is accurate
and these first five days are marked by an advance in the
popular indexes, it bodes well for the entire year.

Over the past five sessions, the number of stocks making
new highs at the Nasdaq and the Stock Exchange has
consistently exceeded 100 issues. The total of new lows
each day has barely reached 30 stocks.

But, this has been the case throughout most of the rally
since Sept. 24.

Clearly, the market is building its confidence not only in
stocks already displaying good relative strength
characteristics. It is also finding favor with beaten up
issues.

After some 14 weeks of advance, the "bargains" out there to
be had that are based strictly on price are few and far
between.

CNBC regularly features Art Cashen, a veteran floor trader
at the New York Stock Exchange, who provides brief
tutorials to the viewer/investor.

Art's latest missive was Friday evening in which he advised
the viewer/investor not to pay too much attention to the
market fads that will occur this year. Instead, he advised
that folks should buy quality issues on a regular basis.

What Art described was a mechanical method of investing
usually called dollar-cost-averaging, which is how I buy
stocks through my ShareBuilder plan.

I make no attempt to chase fads with this portfolio of 34
stocks.

However, this doesn't mean money can't be made chasing fads
- provided you get in relatively early.

And, if you think you're a little late to the party, not to
worry - it's quite likely investors will see many fads in
2002.


2. Observations

On my weekly Saturday taxi excursion to the supermarket,
the price for a gallon of regular at the convenience store
on Market Street jumped two cents to $1.07.99.

Four weeks ago, the price was $0.97.99. To me, it shows how
sensitive fuel dealers are to what OPEC does with its daily
production quotas.

It's not fair, I tell you! It's just not fair!

But, it's a reality we all have to deal with.

Meanwhile, the investment gurus on the TV stock market
channels continue to tout oil and gas exploration stocks.
Most of them have come up off the mat since making bottoms
in November and December.

But, can they outperform in 2002, a year in which everyone
seems to agree will be dominated by a strong rebound in
tech stocks.

Friday, Jan. 4, was a session in which a few Wall Street
firms weighed in with strong recommendations for
semiconductor, data storage and software stocks.

Consider this an opening salvo as it pertains to which
industry sectors Wall Street will be pushing as the market
heads into Earnings Season.

In my view, the intent is to first force investors, both
individual and professional, to dismiss the year-over-year
comparisons of Q4 results, which will be lousy, and second
to make them focus on the impending economic recovery in
the latter half of the year.

If the January Barometer turns out to the bullish for the
entire month, it means that the rising tide that began
Sept. 24 will reach some 18 months of duration.

At that point, Wall Street may begin taking profits in
February, then follow up with some downgrades of stocks
that have advanced anywhere from 50% - and in some
instances - more than 1000%.

But I've been wrong before.

The Jan. 4 edition of Investor's Business Daily in its
Internet & Technology section featured a brief interview by
James Detar with Newt Gingrich, the former Speaker of the
U.S. House of Representatives.

According to the interview, Newt has become a major
lobbyist in Washington for the science of nanotechnology,
or the construction of things at the molecular (and even
smaller) atomic levels.

Newt has always liked gadgets.

However, the last question intrigued me.

"You once said schools should give every child a free
laptop."

Newt's reply: "Every child having a laptop would be a
breakthrough in the 21st century. A free textbook was a
radical idea in the late 1800s. Computer costs are
declining. There's no reason we can't provide every child
with a laptop within a decade."


3. Weekly Portfolio Results

In last week's newsletter I mentioned that this ISN Ones to
Watch Model Portfolio of 16 stocks would only include the
six stocks I picked that actually had a benchmark price,
based on the market open July 25.

To be honest, I was simply too lazy to include an entry
point for the other nine.

However, a couple of readers e-mailed asking about yearly
performance, so I realized I had to provide some kind of
measure of performance on which I could be judged.

It should be pointed out that not every investor begins his
or her investment career on the first trading day of the
year.

As it stands, here are the six stocks I picked with entry
prices and how they've done since July 25, based on the
market close Jan. 4:

SEI Investments (SEIC) 46.45, down 1.5%
Alloy Inc. (ALOY) 15.37, up 51.6%
Pharmaceutical Product Development (PPDI) 36.76, down 16.4%
Daktronics (DAKT) 9.12, down 7.8%
EarthLink (ELNK) 16.42, down 20.5%
SonicWALL (SNWL) 20, down 2.4%

The three water-related stocks that were "purchased" at the
market open Aug. 1 are in the black.

Tetra Tech (TTEK) 17.18 (split adjusted), up 17.5%
American Water Works (AWK) 31.35, up 34.1%
SCP Pool (POOL) 26 (split adjusted), up 1.2%

Moving on, let's turn to this Sweet 16! Portfolio of high-
profile technology stocks that I've been regularly tracking
since late July.

As regular readers are aware, these stocks have been
steadily declining even before the time I first began
writing about them.

Nearly all of them reached new 52-week lows in a panic
sell-off after the market reopened for trading Sept. 17.
Then they rallied.

Let's do a brief review of each stock:

Comverse Technology (CMVT), up 71% from a low of 15.30, the
stock reached its lastest 52-week low in October. Its
trailing 12-month P/E ratio of 22 times earnings is also
the lowest among the Sweet 16? The historical five-year
average growth rate is roughly 30%.

Vodaphone Group (VOD), up 49% from a low of 17.97, the
stock reached a 52-week low in August and is roughly ten
points below the 52-week high of 36.50. This is the leading
wireless services provider in Europe with a strong presence
in the U.S.

Micromuse (MUSE), up 187% from a low of 5.30, the shares
neared 20 in early December before pulling back to 15 and
have trended sideways for a the past 20 sessions. Here's
one poised for a breakout if the tech rally continues.

Corning Corp. (GLW), up 55% from a low of 6.92, Corning
stock rallied to above 10 a share in the past week on news
that management has called back to furloughed workers at
its Concord and Wilmington, NC plants. The news also helped
JDS Uniphase (JDSU) rally above 10.

BEA Systems (BEAS), up 110% from a low of 8.94, the shares
have rallied above the 50-day simple moving average (SMA),
but still see the 200-line, currently around 23, as a
barrier. The stock gained 10.9% last Friday on an upgrade
of the enterprise software sector from a major brokerage
firm.

CIENA Corp. (CIEN), up 79% from a low of 9.20, the stock
rallied above the 50-day line, then dipped below it after
the company warned that sales wouldn't meet previous
forecasts in 2002. In my view, Fiber Optics networks are
still at overcapacity.

Juniper Networks (JNPR), up 142% from a low of 8.90, the
stock displays a pattern similar to CIENA in the aftermath
of a warning about lower-than-expected sales.

Check Point Software (CHKP), up 132% from a low of 19.56,
the shares continue to advance, and are on the cusp of
crossing the 200-day SMA. Still, that is some distance from
where the shares traded 52 weeks ago at 113. In my view,
the market has focused on players in the security software
space with smaller market caps, such as McAfee.com (MCAF).

EMC Corp. (EMC), up 68% from a low of 10.01, the volume was
well above its 3-month daily norm last Friday in response
to a brokerage house touting of data storage stocks.

Network Appliance (NTAP), up 346% from a low of 6.00, this
stock is the hands-down winner since the 9/11 Attack on
America, trading the farthest above its 200-day SMA.  In
fact, the price has returned to the previous high that
occurred in May. There are still 51 trading weeks left in
2002, and anything is possible, even a return to levels of
75 a share 52 weeks ago.

Genentech (DNA), up 40% from a low of 37.90, this is a
megacap biotech stock at $28 billion. The biotech sector
tanked during the Feb-March sell-off, rallied, then tanked
again during the post-9/11 panic sell-off. Biotechs are the
trickiest sector among high-tech stocks. One thing is
certain: most are well-capitalized.

Nokia Corp. (NOK), up 106% from a low of 12.70, this leader
in mobile handsets has made Motorola (MOT), the No. 3
producer, look pale in comparison. If tech is to recover in
2002, then Nokia is a good bet to return to where it traded
a year ago at 45, or another 90% from current levels.

Alcatel (ALA), up 78% from a low of 10.53, this French
optical networking and telecom equipment maker offered for
Lucent Technologies (LU) last year and was promptly turned
down. Meanwhile, Lucent stock can't get out of its own way,
trading in extremely narrow range from between 6.50 and
7.50.

I2 Technologies (ITWO), up 195% from a low of 2.98, it
remains the lowest-price stock among the Sweet 16? Still,
it continues to trade above the 50-day SMA on above-average
volume.

Veritas Software (VRTS), up 178% from a low of 17.30, the
stock has crossed the 200-day SMA in the past five trading
sessions, making it the sixth stock to do from this group
of 16 stocks since the 9/11 tragedy.

Business Objects (BOBJ), up 112% from a low of 17.00, this
French business intelligence software firm continues to
inch steadily higher, and is the closest to the 52-week
high among the Sweet 16?

Conclusion: CIENA and Juniper have weakened, while much of
the overall stock market has moved higher. Can we safely
say that these two former high-flyers are leftovers from a
bygone era?

Be mindful of Art Cashen's advice to the CNBC
viewer/investor as it pertains to this fad business and how
the market will behave in 2002.


4. More $10 Temptation

Last week's newsletter contained a section about stocks
trading under $10 that have rallied off extremely low
prices (under 3 share or lower). They basically belong to
what Wall Street calls the B2B sector.

I did a check of how they stack up according to ratings
supplied by Investor's Business Daily at its
www.investors.com Web site.

What've I've found is that these stocks carry an
accumulation/distribution ranking of B
or above (A is the highest), based on the past 13 weeks of
data.

More interesting are the relative strength (RS) rankings
versus the earnings per share (EPS) rankings. The RS
rankings are very high, while the EPS rankings are, to be
honest, dismal compared with the overall market.

Still, this is where the trading action has been in the
past few weeks. The daily volume figures have been well
above the 13-week norm for these B2B stocks.

In fact, I have personally traded Ariba (ARBA), Inktomi
(INKT) and i2 Technologies (ITWO) on a few occasions since
9/11. My trades have been entirely for the day, going long
only.

By the time this newsletter appears in e-mail boxes, Ariba

In Richard Ney's "The Wall Street Jungle" the author
supplies 21 rules for investors.

Rule No. 2: "Nothing puzzles me more than an investor's
willingness to pay more than fifty dollars a share for
stocks. Buy low-priced stocks. It's percentages you're
after and you'll get them in these stocks in a bull
market."

I still like the Peter Lynch philosophy, even when it comes
to low-priced stocks. Of the five stocks you buy, one will
a screamer, three will be so-so, and one will be a dud.

Aside from the three stocks already mentioned, the other
two are Clarus Corp. (CLRS) and Commerce One (CMRC).

Then there is a sixth B2B stock, Manhattan Associates
(MANH), a component of the Standard & Poor's SmallCap
Index.

In the Computer-Integrated Systems group, which is how IBD
ranks Manhattan Associates, it has the highest ranking of
the 39 stocks in the group.

It also trades substantially higher than $10 a share,
closing last Friday at 33 and change, with a trailing 12-
month P/E ratio of 53.

It should be pointed out that the other five stocks have no
P/E since, which implies that they've had no earnings in
the past 12 months.

So what gives?

Maybe this message from a chat board for i2 Tech might
explain it:

"Based on pure technical reason, I doubt fundamental will
work in this market this year, because economy is bad and
PE of not just I2 but the entire market is ridiculously
high. Thousands of new laid off works will not help the
imaginary economy recovery. Uncle Greenspan knows that the
market is the economy, as CEOs made decisions based on
market prices. Greenspan is pumping money anywhere from 5
to 20 billions of repo money in the system everyday. The
repo money is being used to prop up the market. In short,
PE does not matter for the time being. And I2 simply has a
very good chart, with very strong accumulation. Please note
that this is purely a trade and not a suggestion for
anything longer term than the second Greenspan slowing down
the printing press."

This message from a chat board that mentions these "repos"
has a large influence on the prevailing direction of the
U.S. stock markets, much less individual stocks.

More about this subject in another newsletter.


5. Sonny T. Returns From Japan

I spent nearly one hour on the phone with Sonny T., a
former IBM employee, who has turned to full-time trading
using a system based on William O'Neil's CANSLIM method.

Sonny, whose wife is Japanese, spent the holiday season 
with her parents in Tokyo. He reports that apartments rent
for $20,000 a month!

On his return, Sonny says that he has resumed trading, but
he is still working on the notion of trading for a living.

If he does, he's going all the way by setting up his
trading systems as a business. Among other things, this
means filing with the IRS for professional trader's status.

Since he doesn't have a full week's worth of data for the
software he uses, Sonny said that he would e-mail me his
latest picks and trading results in a spreadsheet after a
full week is completed.

He did mention his system likes Hotel Reservations (ROOM),
an online travel services firm that is majority owned by
Barry Diller's USA Networks (USAI). Diller has sold his TV
and movie divisions to Vivendi (V), the huge French
entertainment conglomerate, leaving him with a wad of cash
to develop his online holdings that also include
TicketMaster (TMCS) and Expedia (EXPE).

Let's wish him luck, for trading full-time is extremely
difficult.


6. IBD Retail Rankings

Last week I submitted two picks from the retail sector -
one long and one short - due to reader interest and the
fact 123Jump.com has moved its Internet reporter, Iliana
Sahandjieva, to cover retail companies.

My long pick of Bed, Bath & Beyond (BBBY), a steady 30%
grower in the home furnishings segment, was "purchased" at
the market open Jan. 3 at 33.49. It finished the week at
33.81 for a gain of 0.6%.

My short pick of Tiffany & Co. (TIF), a leader merchandiser
of luxury goods, was entered at the market open the same
day at 31.05. The shares finished the week at 32.51 for a
loss of 3.6%.

Investor's Business Daily gives Bed, Bath & Beyond an
overall ranking of 99, or A+, while Tiffany & Co. is rated
91, or A-.

With Tiffany carrying such a favorable ranking, this short
pick is a contrary play. My chief reason for going short is
the stock price is still well-below the 52-week high and
didn't rally as powerfully as other retail stocks in the
aftermath of the 9/11 tragedy.

In the Retail-Misc/Diversified Group that includes BBBY,
the current leader is Gart Sports Company (GRTS), ranked
first in overall, technical and attractiveness ratings.

However, Gart Sports is weak in fundamentals, with an EPS
rating of only 47.

But the one-year chart looks good.

SEE: http://finance.yahoo.com/q?s=grts&d=c&k=c2&p=m50,m200

What's also interesting to observe is this sporting goods
retailer's market capitalization of only $245 million,
which barely qualifies it as a small-cap stock.

Can the bullish trend for small-cap and even micro-cap
stocks continue?

Fund managers seem to think so, and so do investors, who
continue to pour money into them. As long as money flows
your way, you have to put it to work.

Let the trend be your friend in 2002 and beyond.


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7. Comment Welcomed

A resident of Wilmington, NC, Dave Jennings performs market
research for Ticker magazine, a monthly publication for
financial professionals. Dave enjoys reader comment and
replies to all e-mails. He can be reached at
djennings@ec.rr.com or djennings@ticker.com.


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INTERNET STOCK NEWS (ISN) (c) 2001

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