Oct 1, 1999 at 12:00AM
While it's interesting to watch the stocks jump around with the speculation of what a partnership among the companies might look like, we'll wait until any concrete news hits before analyzing the impact to our companies. When you've been around long enough to see scads of rumors fade into the night like shooting stars, it's easy to take them with copious grains of salt. Plus, it really doesn't matter to us where these stocks close tomorrow or next week. Rather, it's where the companies will be five years from now that really interests us.
Let's now look forward. Following an article of two weeks ago where I got an overwhelmingly positive response, I figured today would be a good day to again turn on the Rule Breaker Radar (RBR) to scan the investment landscape for companies that are breaking rules. For those who may have missed the first installment of the RBR, check here. Either way, below are the criteria that cause the RBR to blip:
1) The top dog and first-mover in an important, emerging industry.
2) A sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
3) Excellent past share appreciation measured by a relative strength of 90 or higher.
4) Good management and smart backing.
5) The greater the consumer brand, the better.
6) A significant constituent of the financial media is recently on record for calling it overvalued.
Let me again warn that I am casting a fairly wide net here; we're looking at these companies because they are little more than potential Rule Breakers. Perhaps one or two of the seven companies that have now shown up on the RBR will eventually find their way into this portfolio. Perhaps none of them will. Time will tell.
All right, let's fire up the radar and see what's out there....
Qualcomm (Nasdaq: QCOM)
What they do
Qualcomm is one of the world's largest wireless technology companies. The majority of the firm's products are based on its proprietary Code Division Multiple Access (CDMA) technology, one of the emerging standards for next-generation digital wireless systems. The company sells CDMA-based phones, chips, and software. Moreover, Qualcomm licenses its CDMA technology to other wireless equipment makers.
Why is it on the radar?
One of the reasons Qualcomm is showing up on the radar is because it has had an absolutely stunning run over the past year. Check out the chart. More importantly, the company has numerous patents that protect its CDMA technology, and it looks as if CDMA has all but locked up the lead to become the next standard for wireless digital systems. Qualcomm's management has smartly positioned the company to both vigorously sell chips for wireless applications and rake in high-margin royalty income.
Even though Qualcomm has many of the qualities of a Rule Breaker, it looks like it is already in the late stages of Breakerdom. The company has a market capitalization near $30 billion and is already a member of the S&P 500. In fact, with a cash-rich balance sheet and a dominating position in its industry, Qualcomm may even be considered a Rule Maker.
For more reading about Qualcomm, check into the recent Daily Double linked below. Since one of the Rule Breaker qualities is strong past performance, it should come as little surprise that many of the stocks that end up being highlighted in the Daily Double are also ending up on the RBR.
- Daily Double: Qualcomm (8/12/99)
- News: Qualcomm Recovers from Latest Freak Out (9/14/99)
Metricom (Nasdaq: MCOM)
What they do
Metricom is spearheading the use of wireless Internet access devices. The company's primary service allows wireless access to both private systems and the Internet via its proprietary network for a flat monthly fee. One way to look at it is as cellphone Internet access without the phone or the per-minute charges. The service is now available in the Washington D.C., San Francisco, and Seattle metro areas, and rapid rollout in other cities is planned. Right now, the access is offered at speeds similar to typical dial-up services, somewhere near 28.8 Kbps. Metricom is in the process of testing its system at 128 Kbps, and recent partnerships with MCI WorldCom (Nasdaq: WCOM) and Paul Allen's Vulcan Ventures will allow it to offer the higher-speed service in major municipalities across the country.
Why is it on the radar?
Between Qualcomm and Metricom, one might surmise that we think wireless digital systems is an important, emerging industry. Combining fairly high-bandwidth Internet access with roaming capabilities is quite exciting, and Metricom provides an interesting alternative to other wired ways of surfing the Web.
Plus, the company now has the backing of MCI WorldCom and is a key component of Microsoft cofounder turned venture capitalist Paul Allen's Wired World. (Or, wireless world, as the case may be.) The company is currently deep in the red, and there are more than a few financial pundits that will readily point that out. (See criteria #6.)
There may be some lurking competitors out there that have not yet entered the industry, since the wireless network market is only a toddler. In other words, Metricom is the top dog at the moment, but it is just a puppy. Either way, it's worth keeping on the radar for when and if it becomes a clear-cut Rule Breaker.
- Daily Double: Metricom (7/29/99)
3Com (Nasdaq: COMS)
What they do
3Com is one of the nation's leading networking companies. The company makes a wide variety of networking gear, including modems, network interface cards, and hubs. More importantly, 3Com makes the industry-leading PalmPilot.
Why is it on the radar?
How ironic is it that the three companies on today's RBR have "com" in their names but aren't "dot coms"? Regular readers may also be quite perplexed as to why 3Com is on the RBR since 3Com was given the boot from this portfolio less than a year ago. Perhaps if you're reading this report in the palm of your hand, you would understand.
You see, PalmPilots are fairly popular around Fooldom. More than a few folks at Fool HQ are power-users of the devices, including Jeff Fischer. Dare I say they almost appear addicted.
3Com has been contemplating spinning off its Palm division into a separate company, and that's the would-be firm that we're really interested in. Nevertheless, right now all we're left to analyze is a popular product in what we consider to be an important, emerging industry (mobile computing). Right now, Palm owns nearly 70% of the handheld computer market and is clearly the top dog.
However, there is competition to worry about, namely Microsoft (Nasdaq: MSFT). Even though its CE operating system has a comparatively small market share and isn't quite as "slick" as the Palm OS, I wouldn't exactly call Rule Maker Microsoft inept competition. Plus, the founders of Palm Computing have left 3Com to start a new company, Handspring, that has some interesting products that are just being rolled out. Using 3Com's operating system, Handspring may actually benefit 3Com in the long run, solidifying the market lead of Palm OS.
In a nutshell, count us in as handheld computer fans, and we're keeping an eye on the industry for potential investments.
Just like last time, we'd love to hear about companies you think belong on the RBR. Don't be afraid to post your thoughts on the Rule Breaker - Companies Message Board. The idea for adding 3Com largely come to me from this post, and we're always open to other suggestions.
Finally, if you're looking for some interesting reading over the weekend, check out Jeff's special concerning online healthcare. And when you're done reading it, send him an e-mail! Poor, lonely Jeff hardly gets any e-mail.
(Of course, I'm kidding here about Jeff's e-mail. Jeff spends literally hours every day doing nothing but responding to e-mail.)
Have a Foolish weekend!
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