Jeff Fischer suggested on Monday that, now that everyone seems to have abandoned the market, it may be time to get back into it. I'm with him. It may well be that it has much further to fall, but my appetite has turned from shorting to longing. I think that there have got to be some good deals out there in the Rule Breaker world today.

Or maybe it's just that we've got some money now, and it's burning a hole in my pocket. In accordance with our previously stated intentions, we have added $12,500 in cash to the portfolio. This is the first time that we've added cash that's available for investment. (We have added cash to pay capital gains taxes in the past.)

Now it's time to decide what to do with the money. The default option is to leave it in our broker's money market account. Given our tendency to act slowly, this will probably be the case for a while. Another option is to put the money in exchange-traded index funds, like S&P depositary receipts, a.k.a. Spiders (AMEX: SPY), while we look for other investments. That's what I would like to do, at least until we've thought about what we will buy.

But first, I want us to talk about a couple potential Rule Breakers that I've had my eye on for some time.

Check Point Software (Nasdaq: CHKP)
Check Point, the top vote-getter in this year's Rule Breaker Seminar, has a firm grip on the Internet security software industry. There may be weakness in many Internet-related businesses these days, but security software remains strong. Every day, hackers devise new ways to disrupt or infiltrate private networks. Fighting that invasion is not an option for corporations and governments -- it's a necessity. They buy the latest security software first, before new servers or stations or employees.

And they buy from Check Point. The Israel-based company commands 62% of the virtual private network (VPN) software market and 41% of the firewall software market, according to Gartner Dataquest. Sales increased 57% and earnings almost doubled in the second quarter of this year, as hardware vendors took big hits. Though revenue has been flat sequentially in the last couple quarters, operating margins have increased. Sales should pick up now that Check Point has released Next Generation, the latest iteration of its security product.

Check Point has lots of redeeming qualities:

  • It has jumped out to an early lead in a vital industry.
  • It has locked in numerous large clients, for whom switching costs for network software are high.
  • Management has shown the ability to reduce costs, increase market share, and maintain growth in difficult times.
  • It has a strong brand name among technology professionals.

The downside has long been its valuation. When the Rule Breaker Seminar ended, Check Point had a market cap of $21 billion and a trailing P/E around 100. Now, however, it stands at $8.3 billion, near its 52-week low, with a trailing P/E of 30 and 28 times expected 2001 earnings. That's not bad for a fast-growing company with 58% profit margins.

The question is: Can it continue to dominate the market? Firewalls and networks are basically commodity products. Expanding margins will draw competitors like sharks. A little company called Cisco Systems (Nasdaq: CSCO), for example, sells both products. With some focus, it could provide Check Point with serious competition.

For a bullish argument on behalf of Check Point, see this series of posts. For a bearish take, see this post.

FuelCell Energy (Nasdaq: FCEL)
This company finished third in Seminar voting. Normally, I take a pretty bearish view toward "story stocks," which often have a revolutionary product eternally under development but never realize its potential. Fuel cells have been around for a century and a half -- the quintessential "long on promise, short on delivery" technology.

That's changing, however. FuelCell Energy is making stationary generators between 250 kilowatts (kW) and two megawatts (MW) in size. Its patented molten carbonate fuel cell generators can burn many different fuels without an external reformer, which overcomes some of the problems fuel cells have faced in the past. With the addition of a turbine, FuelCell Energy's generators reach efficiency levels of 60%-70%, far above that of diesel generators (20%-30%) or other fuel cells (35%-40%).

Not only is FuelCell Energy's product efficient, it is also clean, reliable, and quiet. Those qualities matter to companies and communities, who are looking to purchase generators in order to reduce dependence on regional electrical systems. California's power crisis has demonstrated that local power problems, whether caused by insufficient production or aging transmission grids, can wreak havoc on people's lives. Companies such as Hewlett-Packard (NYSE: HWP) and AT&T (NYSE: T) have installed large generators in some of their more critical facilities. In the developing world, too, local rather than regional generation is often the only power option.

FuelCell Energy has a viable product. It will reach 50 MW production capacity this year. It has enough cash, it says, to scale production to 400 MW by 2004. It has marketing deals with Enron (NYSE: ENE), PPL Corp. (NYSE: PPL) and Japan's Marubeni, which call for the sale of at least 100 MW worth of generators by September 2003.

Its stock price has also taken a caning lately, dropping 50% in the last two months. It is near a 52-week low, around $17 per share, which gives FuelCell Energy a $640 million market cap. This is a small-cap with solid potential. I think we should look at it carefully.

For those of you interested in the energy sector, by the way, the August issue of TMF Select is devoted to it, from alternative power to Big Oil. You may want to check it out.

What's next?
Those are the two companies that look good to me right now, for different reasons. Check Point has an established operating history with strong results, but it's got less room for growth. FuelCell Energy is an unproven, up-and-coming small cap with a desirable product and a competitive advantage period ahead of it. What do you think? Let us know on the Rule Breaker Companies discussion board.

Brian Lund has a functioning anatomy, but he's not sure that it meets code. He does not own any of the stocks mentioned in this article. The Motley Fool has a progressive disclosure policy.