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Coming the week of November 8th 1999:  An all new stock ideas section featuring long and short ideas.


Dialog PLC DeBeers Consolidated Mines
Inco Ltd. TV Azteca
Phycor Venezuela
CANTV Mavesa
Corimon Air Canada
DIALY (DIALOG PLC): The U.K.'s Dialog has spent much of this year digesting last year's $420 million acquisition of the Knight-Ridder Information unit.  DIALY provides online business info through its DIALOG, DataStar, and Profound services. Its information products deliver market research reports, current stock and commodity prices, and business news. Its searching technology Infosort is recognized as a leader in its field. The company has begun to realize cost savings from the merger. We expect profit margins to increase as the merged companies become an integrated whole. The company recently started a new telecommunications backbone which will provide real time links between customers and data centers. Studies have shown that DIALY's new Dial Unit is  a more cost effective means of providing business info than the pricing plans of its competitors NEXIS and Dow Jones Interactive. We expect Dialog's business to continue its fast growth track and regard the stock as severely undervalued. Technically, the stock is poised for a breakout. A double bottom is firmly in place. Money flow is rising, and showed positive divergences during the stock's recent downdraft. DIALY is one of the only "online" companies worth purchasing at current prices. We look for the shares to hit 15-20 over the coming year. 
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DBRSY (De Beers Consolidated Mines):  DBRSY owns and leases South African diamond mines. Its diamond marketing arm Central Selling Organization controls 80% of the world's diamond market. The company might not have a household name, but it has controlled the world's diamond market for a century and is responsible for such slogan's as "Diamonds are Forever". Unfortunately, growth in demand for diamonds is not forever.The Asian economic crisis has hit  De Beer's share price hard over the past year. The shares have fallen 52% from their June 1997 level as demand for diamonds in Asia has diminished. The company's gold share heavy investment portfolio has been  hit by the bear market in gold prices. Increasing criticism of DBRSY's stranglehold over the diamond market has further dented sentiment towards the shares.  We think that the bottom has been seen and profits will begin to recover next year.  We expect a sharp recovery in these undervalued shares as the situation in Asia begins to improve and diamond purchases recover. Any up tick in gold prices will further boost the company's investment portfolio and give an added upward push to the shares. Technically DBRSY looks poised for an upward move. The shares completed a double bottom with the lows bouncing off of gann line supports each time. We consider this a strong buy signal.  MACD has turned up, and strong positive divergences were seen in weekly RSI and CCI during the second bottom. Accumulation has been taking place in the shares. OBV and Money Flow have turned up.  Our end of year target for DBRSY is the 200 day moving average level at 23. The 12 month target is 27.  Trading at a PE of 9 and at a 1999 prospective PE of 7, De Beers stock is a diamond in the rough.  
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N (Inco Ltd): The troubled Voisey's Bay project continues to plague results at Canadian nickel producing giant Inco. Uncertainties surrounding the project have put in doubt the planned opening of the mine in 2000. Disputes over aboriginal land claims, mining taxes, power costs, and royalties to the Newfoundland government continue to be stumbling blocks to a timely opening. Inco and the Prime Minister of Newfoundland have recently become embroiled in a bitter dispute over the royalty rate to be paid to Canada's poorest province, with neither side willing to budge. The feisty P.M. has threatened to scuttle the whole project and deny Inco permits if his demands are not met. We believe that fears of a deal not being reached are unfounded.  Neither debt heavy Inco nor   unemployment ridden Newfoundland can afford not to strike a deal. We expect the signing of a deal to provide a boost to beleaguered Inco stock, which has fallen 65% since May of 1997. We believe that the stock will receive a further boost from rising nickel and copper prices later this year. The Asian crisis has driven the prices of both nickel and copper to multi year lows. We believe that a bottom is now in place in both metals. A gradual recovery in Asian markets in late 1998 and 1999 will lead to rising prices for these metals later this year. We expect Inco to return to profit in 1999 as the Asian markets emerge from recession. Trading at less than half of book value, these shares are a compelling value play at these levels. We look for Inco shares to move back towards their 200 day moving average of 18 by year end.  We see the stock hitting the 25 to 30 range within 18 months as uncertainties over Voisey's Bay are resolved and metal prices begin to recover. The  current levels of extreme pessimism surrounding these shares provide value hunters a perfect buying opportunity.

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PHYC (PHYCOR): Shares of PHYC have fallen 75% over the past year as troubles at several health care provider companies have led to a complete loss of confidence in the industry by investors. Phycor acquires and operates medical clinics, and develops physician   operated independent practice associations (IPA's). The company currently owns 24 clinics and manages IPA's with 3,000 doctors who serve 133,000 patients. The shares of IPA companies have been decimated as troubles at aggressively managed companies like Med Partners and the recently bankrupt FPA Medical Management have dragged the entire industry down. Overly aggressive expansion, inability to meet the terms of HMO contracts, and sour relationships between physicians and corporate boards have plagued several companies in the industry. Growth in the industry has  slowed amid the confusion surrounding the future of several IPA companies. The conservatively managed Phycor has managed to avoid many of the problems of its competitors, but has been unable to escape the negative sentiment surrounding healthcare providers. The shares of PHYC fell 40% after it missed estimates by 2 cents a share and announced that growth in the second half would fall 10% short of estimates. We believe this fall was unwarranted based on the companies fundamentals. Although the company missed estimates, earnings still rose by 10% and revenues shot up 41%. Operating cash flow continues to grow at strong levels. We expect growth to resume in the 20-25% a year range next year as the current industry turmoil subsides. Based on its fundamental outlook, Phycor is currently extremely undervalued. The company is trading at just 0.8X book, 0.47X sales, and at a prospective 1999 PE ratio of 9. The current share price is based on the extreme negative investor sentiment towards the healthcare industry, rather than on the fundamental picture of Phycor itself. We expect the shares to stabilize at the current level, and to rise sharply as the healthcare industry begins to restore its credibility with investors.  Technically, the stock held an important 4 year support level at 7 1/2 during its recent fall. We expect this support level to hold, and the shares to recover to the 15-20 level within the next 6-9 months as investors begin to once again judge Phycor on its strong growth prospects.

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Venezuela: The Venezuelan stock market has been the worst performing Latin American market this year, falling nearly 60% since early January to a 28 month low. The two main contributors to the bear market in Caracas have been sliding oil prices and a wholesale dumping of emerging market stocks by investors spooked by the situation in Asia.

The Venezuelan market traditionally tracks the price of oil. The country derives 80% of its exports and 60% of its government receipts from the sale of oil. With oil prices sliding to 10 year lows, the economy has gone into a deep recession. Consumer demand has fallen, the Venezuelan Bolivar has come under attack from currency speculators, and interest rates on bonds have risen to a recent 17% as a lack of confidence in the country builds.

Despite the grim sentiment that currently prevails, we believe a bottom is in place in the Venezuelan market. Oil prices have most likely bottomed. Saudi Arabia's recent announcement  of a cut in export volumes will provide the market with a psychological bottom as traders come to realize that OPEC is finally serious about arresting the fall in oil prices. Any upward movement in oil prices will feed through immediately to the oil dependent Venezuelan economy.

We expect the extreme negative levels of investor sentiment towards emerging markets to subside in the coming months. A bailout package will be approved for Russia and we believe the Chinese government will hold firm in its resolve not to devalue the Chinese currency.  These events will allow investors to once again evaluate emerging markets on their  individual fundamentals. The Venezuelan market will receive a large boost as skittish  investors return to the more stable Latin American economies.

We believe that investors who buy Venezuelan stocks in the coming months will be richly rewarded over the coming 2 to 3 years. The market is extremely undervalued. Stocks are trading at record low ratios of price to sales and price to book. Corporate balance sheets are at their strongest in years, and yet stocks are trading at record low P.E. ratios. We expect an upward tick in oil prices and an easing of the Asian crisis to give Venezuelan shares a strong boost over the next few months. The market will receive a further boost after December elections. We expect the Venezuelan stock market to appreciate 50% from its current depressed levels over the coming year. The time to buy emerging markets is when the blood's in the streets, which it clearly is in the Venezuelan market. Our favored stocks to play a recovery in Venezuela are CANTV, Mavesa, and Corimon.  

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VNT (CANTV): CANTV is Venezuela's national telecom provider. The stock has tumbled from 41 in mid April as the Venezuelan economy fell further into recession and Asia related worries caused investors to exit emerging markets stocks en masse. Venezuela's economic woes have caused the company's 1998 earnings estimates to be lowered 20%.We look for earnings to stage a strong comeback as Venezuela digs itself out of recession later this year. VNT is currently the cheapest Latin American telecom play. The company is valued at just $1,000 a line, less than half the average valuation of other Latin American telcos. The shares are trading for less than their $21.57 book value. Trading at just 6.5 times this year's estimates, and 5.9 times 1999 estimates, CANTV is deeply undervalued. The technical outlook for the shares is showing encouraging signs of strength. We believe a bottom is in place. The stock held an important Gann support line at 18 1/2 during its recent lows.  Accumulation has been taking place in the shares since July, a period during which the stock fell 30%. We look for these shares to receive boosts from an oil fueled economic recovery and a more favorable investor outlook towards emerging markets later this year. Our first upside target is the support zone around the 25% retracement level at 24-25. We expect the strong resistance level at 29-30 to hold the shares until after the Venezuelan elections in December, when we expect a post election relief rally. Our 12 month target for CANTV is 35 to 40 a share. 

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MAV (Mavesa SA): Mavesa is Venezuela's leading manufacturer of consumer cleaning products and processed foods. The company's brands are market share leaders in the Venezuelan market (including an 81% share of the margarine marketplace). Second quarter unit volumes rose 22.2% and net sales rose 17%, but gross margins fell as the cost of raw materials rose 17.4%. First half profits fell 24%. Management has announced that the company will post lower profits this year due to the recession ridden Venezuelan economy. We expect the Venezuelan economy to begin to recover later this year as oil prices begin to rise. We expect MAV's profits to recover as consumer demand picks up. The stock, down 67% from its September 1997 level of 9, is currently trading at just 8.9 times 1999 earnings estimates. The PEG is 0.43. Compare these valuation levels to the 30X earnings that slower growing US consumer products companies currently fetch. Technically, the stock is showing signs of breaking out of its slump. Money Flow turned upward in mid July, and has continued upward during the stock's recent slide. Weekly MACD and Stochastics registered strong divergences during the latest slide. Weekly ADX has turned down from a deeply oversold 51. We look for these deeply undervalued shares to find their first upside resistance at 5 3/4. Our upside target for Mavesa is 7 1/2. 

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CRM (Corimon): Paint manufacturer and distributor CRM successfully emerged from bankruptcy in late 1996. The company's stock has fallen over 80% from its November 1997 level as a sharp downturn in consumer demand and rising interest rates have bit into profits. First quarter profits slid almost 90%. The company recently delayed plans to sell its ailing packaging unit, which has been severely affected by the downturn in the Venezuelan economy. Despite this delay, we still expect the division to be sold when the economy turns up. The company's core paints business has remained solidly profitable throughout the downturn. The stock is extremely undervalued at current levels, trading at just 0.2 times book value. We view this stock as a good way to play an upturn in domestic demand in Venezuela, but we would caution that it is an extremely risky investment suitable for speculation only. 

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TZA (TV AZTECA)(TV AZTECA): Former high flyer Mexican broadcaster TV Azteca saw its shares sink over the past year from a 52 week high of $23 to a low of $4.25 on September 14th as a combination of falling ratings, a slumping peso, and emerging market flight sent investors fleeing en masse.  The shares had been driven to over valued levels as unrealistic analyst growth expectations were factored into the share price and drove it steadily higher. Heavy ad spending during last year's Mexican elections and during this year's World Cup produced an unsustainable surge in advertising revenue growth for Mexican broadcasters. The subsequent falloff in ad spending, and the resulting slowing of growth rates, caused a rerating of earnings estimates.  A new programming strategy at Azteca added to the profit woes as the company saw a steep drop in ratings and market share during the first seven months of the year. The company was further hit as a falling Peso raised the costs of servicing the company's heavy dollar denominated debt load. Add to these operating woes a wholesale dumping of emerging market stocks by panicked investors and you have the recipe for a share price disaster to occur.

We believe that the worst has passed for TZA, and that the pieces, both internal and external, are in place for an upward rerating of the shares.  The external factors that had hit the company's share price have begun to recover.   Negative investor sentiment towards emerging markets hit an extreme level in early October and has since begun to stabilize. Any decrease in bearish sentiment levels will result in a gradual recovery in emerging market stock prices from the panic induced lows seen earlier this month.  The Peso has also stabilized as fears of a Brazil led Latin American economic implosion subside.

Azteca is taking steps to address its operating problems.  The company's new programming strategy has begun to pay dividends, with ratings recovering 33% from July's lows.  The company has new soap operas planned which will add to the ratings ( and market share) recovery already taking place. The company's just released 3rd quarter results show small gains in revenues and E.B.I.T.D.A. (Foreign exchange losses caused TZA to show a net income loss).  The company incurred heavy expenses earlier this year in developing its new programming strategy, and will benefit as these non recurring costs no longer provide a downward pull on profits.  Advertising demand will pick up in the Mexican market during the 4th quarter as advertisers try to compensate for the fear induced consumer slowdown of the past few months and spend heavily to promote the holiday season.  The overwhelming majority of these ad Pesos will be spent on the television broadcast market.  The TV broadcast market is the only medium with truly national penetration in Mexico, and consequently advertisers spend 75% of their ad budgets on TV advertising (versus only 24% in the U.S.).  We expect the improvement in TV Azteca's operating climate to translate to a higher share price in the months ahead.  The shares are currently undervalued, trading at just 10 times next year's estimates. The forward PEG is just 0.4. Our 6-9 month target for TZA shares is $15-$20.


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ACNAF (Air Canada [Non voting shares: ACNAF (NASDAQ), AC.A (Toronto)])):

Montreal based Air Canada is the largest airline in Canada.  The company's fleet of 157 aircraft provide service to over 545 destinations worldwide. The company is a member of the Star Alliance of airlines (other members include Lufthansa, SAS, Thai Airways Int'l, Varig Brazilian, and United Airlines. All Nippon Airways, Air New Zealand, and Ansett Australia will be joining the alliance in 1999.). The company has suffered through a difficult 1998, and has seen its stock price plummet from over $9 a share at the height of the public's love for the airline sector in April  to the present $3.38 . 

The company lost $0.31 in the third quarter due to a 13 day long pilots strike which cost ACNAF $212 million.  The strike caused revenues to decline by 17.9% during the quarter.  The company expects to incur fourth quarter operating and net losses as a result of the strike, and will also report a loss for the year due to the strike. 

The Asian economic crisis has hit the company hard this year.  The Star Alliance's large exposure to the Asian market has hampered member airlines this year as passenger and cargo traffic have slumped noticeably.   Air Canada's passenger traffic to Asia and Britain has seen reduced rates of growth this year, and its cargo operations have suffered a 6.7% decline in revenue ton miles.   Cargo load factors in the airline industry as a whole have suffered recently as the full effects of the Asia/Russia/Emerging markets collapse have begun to be felt. 

Air Canada is also suffering from a highly leveraged capital structure and operating costs that are growing faster than revenue growth. ACNAF's costs have grown by 10% over the past two quarters while revenues have increased by just 8%. The company expects fourth quarter revenue growth rates to be flat to down, while capacity will increase by 5%.  The company has recognized the need to bring its cost structure into line with revenue growth, and is taking measures to address the problem.  The company plans to delay the delivery of 5 Airbus aircraft and to make job cuts to bring costs down.  Air Canada is also planning to retire older planes earlier than planned, and fly fewer available seat miles as a means to reduce costs.

We believe that ACNAF's cost cutting moves and a gradual recovery in Asian markets next year will enable the company to stage a turnaround in 1999.  The company will benefit from any pickup in the Asian economies as its membership in the highly Asia dependent Star Alliance begins to bring increased traffic to the company's routes via the numerous code sharing agreements it has forged.   An Asian recovery will put a halt to the decreases in cargo load factors that have plagued ACNAF this year as cargo volumes pick up in tandem with economic recovery.   The Air Transportation Institute is expecting overall industry ridership to increase next year, and Air Canada will benefit from any industry recovery.  Air Canada's earnings could surprise on the upside if Asian economies recover faster than expected.

The end of strike related losses, and the accompanying abatement of strike-related negative investor sentiment towards the stock, will enable the company to return to profit in 1999 and the depressed stock price to stage a partial recovery.  Throughout this year's downturn, the company's domestic Canadian and U.S. operations have remained strong.  We expect this trend to continue next year.  The company produced strong results in October, with revenue passenger miles increasing by 8.4% and its load factor increasing by 2.7%. 

Air Canada is currently undervalued relative to both its historical norms and its industry.  ACNAF is trading at 1.4 times cash flow, versus 2.3 times for the airline industry.  Other valuation measures are equally undervalued: ACNAF trades at a trailing P/E of 4.3, versus an industry average of 9.5; ACNAF has a Price/Book ratio of 0.58, versus 1.01 for its industry.  We expect Air Canada's depressed valuation levels to return to near the industry norm as investors begin to put September's strike behind them and start to focus on the company's future prospects.  An expansion of the P/E ratio to the industry average implies a price of $5 1/2 to $7 over the coming year.

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Last modified: April 03, 2001

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