Today’s Issue: Ask the Analyst.

Editors Note:

Over the last few issues of StockUpTicks we’ve received a multitude of letters of appreciation for the keen insight of our favorite market guru, analyst Doug Rogers. Many of you note how Doug’s easy-to-understand guidance has assisted you in what we’ll mildly term a wacky stock market.

Along those lines, we’ve been receiving a lot of mail from members wanting to ask Doug his thoughts on a variety of issues. Since Doug’s a popular guy, there’s no way he can answer each and every one of these queries but we’ve compiled a list of member questions that cover most of them. 

Take a look, your question may be among those we chose or a question that’s been on your mind of late could very well be answered below.  We also welcome you to submit your 'Ask the Analyst' questions here (click here) and we’ll try to respond to them next time.

But before we dive into the mail bag, we wanted to bring your attention to the performance of our two featured companies this week. Both of these environmentally sensitive companies, SulphCo, Inc. (OTCBB: SLPHE) and Environmental Solutions Wordwide, Inc. (OTCBB: EWSS) experienced tremendous volume and price increases, take a look ...
 
 

When do you see the market as a whole turning around and is it showing signs of real recovery now as many are saying?

Doug Rogers: Positive market response is predicated, to a large degree, on stability.  This includes earnings and corporate stability as well as political and social stability.   Currently we lack a lot of that stability.  Economic reports have been erratic and contradictory.  This compounds the problem because it doesn't provide investors with a solid financial foundation to base their decisions on.  For example, the surprising 5.6% increase in GDP for the first quarter is deceptive because it is mostly attributable to companies building up inventories that have been depleted over the past few quarters and not to new or expanding sales.  When will the market turn around?  When we see consistent, positive progress.  Politically this doesn't necessarily mean solution, but rather constructive and positive initiatives that focus on moving towards solutions.  Financially, this means moderate consistent reports at both the macro and micro economic levels.  Any result data that is wildly out of the norm is most likely anomalous and should not be viewed as a mutually exclusive indicator in any particular direction. 

Will small caps and OTC stocks trail behind or lead the market?

Doug Rogers:  They have certainly been leading lately and I think this trend should continue.  I think investors are getting a sense for small-cap stocks and they appreciate the innovation and flexibility they represent, both for the business and for themselves as investors.  Investors are also seeking alternatives to poor performing companies and sectors as well.  Worldcom is a great example.  The telecomm sector certainly isn’t going anywhere, so investors still want to be involved, but with stronger companies that present a brighter future than some of the enormously indebted and poor performing examples out there.

How do you view “Enronitis” affecting the market moving forward? Will this cause companies to be ultra-cautious in earnings statements and annual reports, thus less optimistic projections? 

Doug Rogers:  I want to believe that this will create a smarter, more savvy investor while holding public companies to much higher standards.  However, in the long run, I don’t think it will have a significant impact, despite how it currently appears.  The fact is that most companies operate their businesses properly and disclose information freely.  It’s really a shame that Enron has palled the markets with so much suspicion and distrust.  The major tellecoms certainly aren’t helping investors regain much-needed confidence, either!

When do you see the stigma coming off of Tech and Internet companies? Is there something to be said for those that are still in business today or are they just slowly exhausting the rest of their venture capital?

Doug Rogers:  Well, from the investor’s standpoint, most tech companies are still substantially overvalued.  So, you could say that the stigma hasn’t affected them much at all.  I think most investors understand that technology is still the future and that, despite the gross mismanagement of funds and frivolous venture capitalists encouraging the melee, some companies, like Adobe and Microsoft continue to show the value and potential of their products.  As for those that are still in business, I think that they have a greater understanding for what elements they need to succeed and have proven a great deal of resiliency.  However, I don’t think that we’ll see the same kind of “irrational exuberance” that we saw previously.  I have always (even during the “bubble”) felt that the vast and fragmented tech industry was merely acting as a proving ground for the old stalwart “brick and mortar” companies.  You will continue to see a proliferation of the brands that you grew up with into the technology sector.  They have substantial capital, strong ongoing revenue and now the knowledge of how to succeed in the tech sector by using technology in coordination with their traditional business and not as an alternative or replacement to it.  Examples?  How about Safeway delivery instead of Webvan? Or, Kmart, Saks Fifth Avenue, Kodak, Citibank?  They all came late to the proverbial party because they were smart! 

I’m a big fan of eBay (NASDAQ: EBAY) and I know they recently raised their listing fees. If their auction volume stays the same does this mean that their earnings must increase next quarter?

Doug Rogers:  The simplistic, utopian answer is yes.  If all else remains static over the next period except for raising their fees, then earnings will be higher.  The reality is that merely raising prices won’t necessarily affect EPS.  Remember, EPS is net of pretty much everything, so you have to consider whether their operating and capital costs are going up, or down.  Will they take any one-time charges?  Will they issue more shares, or buy some back?  How many preferred shares, options or other derivatives will be converted or awarded.  Will they make new capital investments or divest lagging divisions?  Are any debt instruments becoming due and payable, or are interest charges changing?  How about taxes?  Are there plans for any new products and services?  And it goes on and on.  For a company as large and complex as Ebay, product pricing is merely a tiny piece of the total EPS puzzle. 

If K-Mart (NYSE: KM) folds for good any time soon, what sort of effect can we expect on Wal-Mart (NYSE: WMT) short and long term?

Doug Rogers:  Conventional wisdom suggests that Wal-Mart would benefit substantially from a Kmart demise.  At this point, Kmart’s current condition and future viability is so unclear, that almost anything is possible.

What do you feel will be the hot sectors in coming months?

Doug Rogers:  Hard to say.  Typical summertime cyclicals like travel, retail and related industries are facing an uncertain future due to the catastrophe of September 11th and its continual fallout.  Durable goods and raw materials have had strength lately, and I think that that’s likely to continue until the stability I spoke of earlier starts to develop.

I’m very interested in what I see as a slow movement away from oil-consuming cars, no doubt due to the present war in Afghanistan. If this movement continues, do you feel there is real potential in alternative energy stocks?

Doug Rogers:  There is tremendous potential in alternative energy stocks.  But there’s a caveat: time.  Alternative energy stocks are a long (very long) term proposition.  We will see an enormous amount of research and development dollars spent to develop, sell and market truly viable alternative energies.  Then you have to consider market penetration and the cost of replacing or modifying existing machinery to utilize the new fuels.  It’s no secret that alternative energy is the future of the planet.  The question is when and how much will it cost to develop?  If you are seriously considering, I’d suggest looking for companies that have sustainable revenues to ensure their market viability and longevity and then set your investment time frame to at least 5 or 10 years.  Probably longer.

Have you noticed any new trends, positive or negative, beginning to emerge in the market?

Doug Rogers:  Yes….down!  Oh, sorry that’s become an old trend!  Seriously, I’ve noticed strength in raw materials and durable goods.  Other than that, sentiment has been erratic due to the inconsistent and confusing political and financial climates.  Any trend I notice today will most likely be undermined tomorrow.

Say you received a tax refund of $5,000. Where would you invest it if you were looking for short term gains and moderate risk?

Doug Rogers:  I hate to tell you this, but my background has shown that it’s futile to think in those terms.  Right now, sentiment is ruling the markets more than financial results.  Thus, to think in terms of short term gains is just asking for a loss.  And moderate risk?  Right now, no investor should be thinking in any terms less then 12 months.  I’m sorry, but that’s reality.  The only way to moderate your current risk is to increase your investment timeline.  They work inversely, just like price and interest. 

Safe Harbor Statement: Statements contained in this document, including those pertaining to estimates and related plans other than statements of historical fact, are forward-looking statements subject to a number of uncertainties that could cause actual results to differ materially from statements made. 

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