In view of a few questions received over the last month, the usual format of this newsletter will not be followed this month

In view of a few questions received over the last month, the usual format of this newsletter will not be followed this month. We will attempt to answer as many of the questions from readers, in the context of the stock selections we made on January 1, 1999.

Question 1

When are you sending us a new selection of stocks? We need a new portfolio or selection of stocks because it appears we have been stuck around the 100% return range and we are not going to gain further returns.

Answer

How times have changed, we remember 1997 my total returns for the year was 47%, 1998 was 161% and we were very satisfied. Today 100% is not enough for us, just look at what we have achieved in the first 5 months of 1999. Aren't we getting spoiled by the good times, some of the picks have appreciated by 1083%. We expect a slowdown till late October 99.

We have revamped the portfolio by replacing Certicom Inc (CIC/TSE ) with Jaws Technology (JAWZ-$2.97). We still believe that Certicom will end the year at least 50% higher than its closing price ($13.20) on Friday, May 28. Jaws has the most secure (4096bits) and fastest system in the world, Certicom has 210 bits, while all internet banking uses 128 bit encryption software.

If you page down to the first copy of the Newsletter - 990102 , we clearly stated that "There is a small Calgary company called Jaws Technology (NASDAQ:JAWZ - 45 cents a share ) with a better technology than CIC, but does not enjoy the brand awareness or marketing clout that CIC has built in the last 3 years". Today, JAWZ has grown up and it is getting noticed. It closed at $2.97 on Friday, May 28. Its no longer a marketing failure.

Four other stocks have also been added - HMSK ($6.4375), FNCM ($6.84), SOJ/AL($1.67) and PTI/TSE (9.55). Please note that it is very crucial to buy into these stocks at the right level. The suggested ranges are as follows: HMSK - below $6.50, FNCM - $5-$7, SOJ - below $1.70, PTI/TSE $6- $8, JAWZ - $2-$3

Of the original 8 stocks in the portfolio, 7 still remain. We have indicated our target selling prices for the remaining stocks and we still believe in the business models of these companies and the superb execution to date. Certicom has been replaced because we have not been satisfied with the execution of their business plan.

We do not expect any major upward move in prices over the summer months, if anything, we expect downward price pressures because:

typical slowdown in summer, due to technology buying cycles slowing down, accounting decisions being made for the next year.

too many Internet IPOs coming at once, diluting the market for new issues and causing some dilution for existing public companies in the same sector.

interest rate concerns.

Question 2

Why are you so pumped up on Forbes Medi-Tech (FMI/TSE)? I hear you have a business relationship with Don Lay, VP-Investor Relations at Forbes Medi-Tech. Are you hyping this stock?

Answer

FMI is the leader in its industry (the industry has 3 products Aviva, Benecol and Take Control). FMI's cholesterol-reducing Aviva additive is the only one among the 3 competitors that does not affect the taste of its constituent food item. At $16 it is currently valued at 10% of Raisio (manufacturer of Benecol), even though Aviva's quality exceeds Benecol and Aviva's marketing is being done by Norvatis instead of Johnson & Johnson.

Additionally, Take Control (Unilever) & Benecol can only be added to margarine while Aviva can be an additive to any food item, including water.

The icing on the cake is that Forbes also has two other technologies "Cadiorex" and "Androstenedeone (AD)" - primary input to the $8B contraceptives and sex-hormones industry. FMI can currently produce AD at $60/kg and sell it for $200/kg in a $1B AD market.

We are excited by this stock because of the reasons above.

We consider ourselves educated and active investors, we always write down the reasons for investing a company. We send mails to Investor Relations departments of companies we have invested in, seeking clarifications. We have a lot of our money in FMI and that of our children's RESP. we visited SOJ/AL a few weeks back and was impressed with what we saw. The stock closed at $1.67 last Friday. We will buy this stock anywhere below $2

Question 3

I don't have a lot of dough so I couldn't spread it over the 8 stocks you suggested on January 1, I have been reading your newsletter since its first issue. Which one of the eight stocks should I put my money in?

Answer

Its not eight anymore, its now 12. A basket (diversification) of stock investments is better than one or two stocks, but if you insist then FMI & CUST may give you maximum returns for one year.

Question 4

Are we going to have a market correction?

Answer

A year ago on May 28, 1998, the TSE closed at 7580. Last Friday May 28, 1999 the market closed at 6803 (10% lower). Canadian markets have not enjoyed the recent records set by the Dow, S&P and NASDAQ and should not be affected significantly as the US markets. Even if there is a correction, the market will bounce back because there are too many bargain hunters. The issue should be when will the bounce back occur?

Barring any surprises from the non-farm payroll numbers due on Friday June 4, 1999 and retail sales numbers on the 11th of June 1999, we do not expect the Fed to raise short term interest rates before the end of June 1999. That is the only event likely to cause a correction in the short term.

Question 5

Why are you so much against mutual funds?
Answer

USA Mutual Funds - maybe

Canadian Mutual Funds - Absolutely, no way.

Because in majority of cases, you earn peanuts and in Canada, they still charge you 3% Management fee (MER). Look at my E Retirement Pension Plan, my return for the half-year was negative 3.2% and they still charged me their 2-3% management fee.

Moreover, we don't like their window dressing before quarter ends and their stock turnovers.

Question 6

If I gave you a $1000 today and asked you to put it somewhere safe that I don't need to worry about for 10 years, which stock will you buy and why?

Answer

We will put the $1000 in a company called Paychex Inc (PAYX-Nasdaq)

This company has produced 35% compounded growth per year for the last 20 years. We are assuming the good times will continue, but it's not always the case.

Question 7

Just wanted to say great call on "CUST"! up $26 on one day or a measly 43%. I wish I could have gotten in before, but alas funds are a bit low. The others aren't doing too hot, however, any more of the newsletters I've been missing or other tips to share?

Answer

CUST was for a long time $10 but as we mentioned in the Newsletter of April 11, 1999, there is a tremendous amount of research, before putting these companies on the Watchlist. As mentioned, to make the grade a company has to meet certain requirements and surely David Cook (formerly of Blockbuster Video) and his team at CUST easily met the management criteria. You ain't see nothing yet. Other analysts came up with target price of $230 for CUST within 12 months, it closed at $60 last Friday.

If you were tracking these stocks in a Yahoo portfolio you would notice that the portfolio has gained more than 100% with FMI at 30% (at the low end) and SNMM at 631% (at the other end) year to date May 28, 1999.

Don't forward this mail, send mail to URL below if you want to receive this free Newsletter.