A Whole New World

The events of September 11 have left an indelible mark on our minds, our hearts, and our national psyche. As minor as it may seem in light of the tremendous human tragedy, the attacks also left their mark on clients’ portfolios, and changed our view of the investment landscape. Given the profession we find ourselves in, we must examine with clear heads the new lay of the land.

The near-term future map of our markets will have to account for a prominence of defense- and security-related companies, chief among them those that focus on biometrics, e.g., Invision Technology (INVN), Visionics (VSNX), and OSI Systems (OSIS). Videoconferencing–e.g., Picture Tel (PCTL)–has also recently plugged into what had been ever-elusive stock price gains. (Such stocks were the green spots on the Nasdaq.com “Heat Map,” which is similar in intent to the SmartMoney.com’s map of the market, but better in function for the tech sector and pre-market (http://screening.nasdaq.com/heatmaps/heatmap_100.asp). While the latter company and its type are self-explanatory, the former genre is really just coming into view. Basically, biometrics includes face, voice, or fingerprint recognition systems that can detect, for example, one face in a crowd of thousands. Other companies that manufacture full body X-ray machines, or chemical sniffing systems used to detect bombs, also recorded gains.

Defense stocks also jumped up, and Northrop (NOC) and Raytheon (RTN) were among those who gained ground. Raytheon had a piece of less-well-known news that looks suddenly relevant (rather than a mere puzzling feat of engineering): On August 25, it successfully landed a 727 civil aircraft using a military Global Positioning System (GPS) landing system. The plane, a Federal Express 727-200 aircraft equipped with a Rockwell-Collins GNLU-930 Multi-Mode Receiver, landed using a Raytheon-developed military ground station. The new news: This technology could be used to land a plane in the event of a hijacking.

Raytheon and Northrop look well positioned to sustain their current price levels based on existing valuations and current political conditions, but the smaller-cap niche biometric and videoconferencing companies’ sudden surge in stock prices, while flashy enough to get most investors’ attention, may not pan out in the long run, since the jumps were the result of an external event rather than a new product initiative or sales achievement. Among the only ones that looks like they have enough legs to stay the course are the ones referenced above. Also, P2P, which I’ve written about before in the form of Groove.net–there are other players in this space, too–could gain some ground. That said, all the above referenced companies are on my watch list and one or two could make an appearance on this page in the coming months.

In the meantime, many investors could easily look at the market activity in the past month as a fall clearance sale. While the temptation may be to buy indiscriminately on labels that seem cheap, a true bargain hunter (or the husband of one) knows that an ugly Prada pocketbook at half-price never performs if left in the closet whereas the no-name purse that was picked up for one-tenth the price stays in rotation, no matter what the season. In other words, a bargain isn’t a bargain if it doesn’t work for you. The three companies spotlighted this month are all cheap and, I think, all have reasonably good outlooks.

Services

Gentleman Callers

Lightbridge, Inc. serves upstanding cell phone customers while stamping out fraud

Keeping corporate clients happy is at the heart of our next company’s business plan. No, I’m not talking about the world’s oldest profession. Instead, I’m talking about one of the world’s newest professions: Lightbridge provides mobile business solutions that, in industry jargon, support the “complete customer lifecycle”–customer acquisition, payment, and retention. This Burlington, Massachusetts-based company began in 1989 with a Credit Decision System that simplified the process of applying for a cellular phone. What had taken hours or days to approve could soon be done in the blink of an electronic eye.

In the intervening years, Lightbridge evolved their products to suit their clients’ need to stay competitive in a dynamic environment. Currently at the heart of this is Lightbridge’s Customer Acquisition System, or CAS. CAS is a software product that allows customer acquisition while simultaneously combating subscription fraud and controlling risk. It’s useful enough that industry heavyweight Sprint PCS just renewed its contract for an additional three years.

While Lightbridge is in a low-margin, commodity-like business, it’s not a trivial decision to extend what amounts to virtually unlimited credit to a cell phone user. In addition to the standard problem of people with some money problems honestly unable to pay a $100 bill, you also have to contend with the kind of scam artist who sells “discount” on-the-street phone calls to immigrants’ home countries, then disappears after ringing up $10,000 in foreign tolls (or sells the phones for cash to the street hustlers who do this). The kind of intelligent software that can most effectively spot fraud while raising the fewest false alarms (i.e., turning down good potential customers) depends on an established system with massive data and experienced people, and the value of such a system is commensurate with these same abilities and the dollars at stake. As the business becomes increasingly competitive, Lightbridge is well positioned to provide its clients with a bridge from products to profit.

Short-term prospects for Lightbridge will surely depend on how sustained the interest in the wireless industry turns out to be. After September 11, demand has been surging, but more significantly, we’re nowhere near the saturation levels seen, for example, in Japan. With 28 million shares outstanding, Lightbridge has a $250 million market cap. Consensus earnings per share estimates for 2001 and 2002 are positive at 0.70 and 0.81 respectively. And with a P/E of 13 times trailing earnings, Lightbridge looks attractive at the current trading range of $9 a share. While analysts aren’t predicting a whole lot of growth, the numbers show potential for growth at a reasonable price–a welcome find in any market.

Technology

Location, Location

Lost? With its global positioning devices, Garmin Ltd. may know exactly where you are

While GPS depends on satellite transmissions, the service is free (or rather, paid for by our federal government). It doesn’t sell advertising, and it doesn’t really provide any information other than distance and time codes. So GPS isn’t really a telecommunications service, but rather a piece of hardware that always knows where it is as long as it’s outdoors in reasonably open terrain.

If you know boats, you probably know Garmin Ltd. Its handheld global positioning satellite (GPS) devices and sonar depth/fish finders, which can now be had for close to $100 (and are now sometimes included free with outboard motors and other outdoor products), are increasingly ubiquitous in the hiking and boating markets. While big-water boaters have long known of the utility of such devices, inroads in the hiking market should prove more and more important, as there are a lot more people around who hike at least occasionally than there are people who own boats.

The GPS system used to be encoded to reduce accuracy on civilian systems to about 100 yards, but in May of 2000, this “selective availability” was deactivated, and civilian GPS systems are now usually accurate to 10 yards or less. The military may decide to turn the codes back on if, in time of war, it appears that our enemies might use GPS-guided weapons (similar to some of the bombs that we have been dropping on Afghanistan); such a move would degrade the civilian GPS system’s accuracy, probably to about 100 yards, as before. Such a deliberate degradation might be global, or could be applied regionally to an area of concern.