WHY: Does Overture Services Inc. (OVER) deserve an encore? Rashtchy thinks so. Shares of the pay-per-click search engine company rose 385% in 2001, the fifth-best performance on Nasdaq. Rashtchy thinks Overture will turn in another star performance in 2002, and awarded it his only buy recommendation. He thinks worries about new competition are overblown, and predicts the stock, which has dropped to $22 from $40 during the past six months, will bounce back to $44 in the next year. Overture, he bets, will earn $68.4 million on 2002 sales of $577 million. Next year, he expects a dip in profits, to $53 million, but is bullish because sales will rise to $702 million and the profit dip will be due mainly to higher taxes. He believes his estimates are conservative.
Every other stock is a runner-up for Rashtchy, but he also likes USA Interactive Inc. (USAI) and Yahoo! Inc. (YHOO), which he rates as "market outperform." He sees Yahoo's revenue climbing about 25% this year and next, as the portal shakes off 2001's online-ad bust.
He's higher on USA, which has plenty of cash for acquisitions in high-growth, high-margin businesses, especially in online travel. On June 7, USA said it would pay $578 million for Interval Acquisition Corp., which runs an online and offline global market where people swap use of time-share real estate. Rashtchy says USA's stock will hit $38 within a year, up from $24 now, as revenue rises an expected 25% in 2002 and in 2003. Returns like those may not evoke the gold rush era, but if USA builds profitable properties, shareholders could still strike it rich.
WHY: Picking stocks was mostly a loser's game over the past year. But Callard Asset Management has put together a stellar record in the decimated telecom sector. The outfit, led by president Charles G. Callard, has racked up a 60% return over the past 12 months.
Callard's success may be tied to his unique investment style. His research starts with Value Line Inc. (VALU) forecasts for earnings five years out. Callard thinks that's the best predictor of a company's cash-generating capabilities. He then discounts the cost of capital priced into the stock--the rate of return that investors are expecting. Then he compares that with his own estimate. If he detects a bargain, he considers the stock.
Today, Callard is recommending two telecom companies: IDT Corp. (IDT) and Teléfonos de México (TMX). IDT is promising because the Newark (N.J.) long-distance player is scooping up assets from bankrupt rivals. Value Line forecasts that IDT will make $80 million on revenues of $2.3 billion in 2006. Callard figures IDT's stock, now at $18, will rise to $21 over the next year.
Telmex, the former phone monopoly in Mexico, still dominates that market. That should help its profits rise to $3.5 billion in 2006. Callard thinks that growth could propel the stock from $35 today to his one-year price target of $54.
Unlike many on Wall Street, Callard is willing to issue sell recommendations. He has a sell on Level 3 Communications Inc. (LVLT) Although the long-distance upstart's stock has tumbled some 95%, to $4, Callard doesn't think it's a bargain. He expects more losses.
WHY: Since the software industry started heading south in early 2001, Austrian has been the bear of bears, cutting estimates on nearly every software stock. He has only one strong buy: Digital Insight Corp. (DGIN), a small company that helps banks get their businesses online. He thinks the stock, which is trading at $12, will hit $30 this year. Why? Digital Insight provides software online as a service, so most revenues are recurring. He expects sales to jump 44% this year.
He also likes Microsoft Corp. (MSFT), which rules the PC-software market. That's not all he likes. Microsoft upped its share of database software to 14.4% in 2001 from 11.6% in 2000. He predicts revenues will rise 10% in the fiscal year ending June 30. He has a buy on the stock and a $63 target price, up from the $54 it's trading at today.
Austrian's third pick is contrarian: customer-management-software maker Siebel Systems Inc. (SEBL) It's out of favor with many analysts because its revenues are expected to fall 3.7% this year. Yet Austrian has a buy rating and a $30 target price for Siebel, which is trading at $19. He's betting cost cuts will boost profits 12.4% this year.
WHY: The computer-hardware sector has crashed like an old version of Windows. Once a double-digit growth industry, sales fell 14.3% last year and are expected to drop 1.7% this year. No wonder Wagonfeld's hardware picks have less and less to do with hardware.
Take IBM (IBM). Big Blue gets less than half its revenue from hardware. Instead, it's putting muscle into selling software and services. Wagonfeld expects IBM's revenues to fall 4.2% this year. Still, he has a buy rating on the stock. With IBM's $5 billion investment in R&D, it's well-positioned for recovery in 2003. He thinks shares could rise to $100 within 12 months, from $78 today.
He's also keen on TechData Corp., the No. 2 distributor of computers and peripherals. TechData has expanded the array of services it offers manufacturers, including managing the shipping of products to dealers. Wagonfeld rates it a buy, and thinks shares could rise over the next year to $50, from $40 today.
Sun Microsystems Inc. (SUNW) is a favorite, because, well, it's cheap. Shares of the money-losing computer maker are now $7. If profits return in fiscal 2003, shares could hit $10.
WHY: For years, corporations hired specialists to manage computer networks and payroll. Now they're also farming out tasks like human resources and 401(k)s. This new breed of Business Process Outsourcing (BPO) is growing up to 20% a year, says Keirstead.
That's why he has a buy on Affiliated Computer Services (ACS), which gets two-thirds of its revenue from BPO. He expects the shares, now trading at $55, to hit $65 within 12 months. Sales and profits are expected to rise more than 20% in 2003.
Keirstead's other picks also are linked to outsourcing. He has a buy on Anteon International Corp. (ANT), a Fairfax (Va.) defense contractor that specializes in info tech. Lehman Brothers helped take it public on Mar. 12 at $18 a share. It's now trading at $24, but Keirstead thinks Anteon can support a price-to-earnings ratio of 30, giving it the potential to reach $30 in 2003. He predicts sales will grow 14% in 2002.
He also has a buy on Electronic Data Systems Corp. (EDS) because its shares have been beaten down. It's trading at $51, or 15 times 2002 earnings. Keirstead predicts that, within the year, EDS will hit $65, or 20 times 2002 earnings. EDS is in the running for deals that could fuel earnings growth of 21% in 2002.