Re: Thanks Thomas (and all above too)...

Gordon,

It's clear from your post that you have a great mind for investing!

Being able to identify who is effected -- both directly, and indirectly through flow-on effects -- is an excellent way to find investment opportunities that others may overlook.

In your example, you've identified a clear supply chain where all companies in the chain may benefit from increased sales of foldable LCD screens. This information might only be seen in the share price of the most directly effected though, perhaps making it not that great a bargain already.

While looking at the others in the supply chain that you think will benefit from these increased sales, things you'd want to look at are:

- How solidly linked are they? Can the person they're supplying to go somewhere else, or perhaps later produce the materials themselves?
- What are profit margins like? If my volume of sales will go up, but my margins go down (perhaps due to greater bargaining power of the person I'm supplying to), perhaps the profit increase might not be as large as expected.
- What's the exposure of the supply company to the product I'm looking at?

By that last point, I mean... Let's say you have a plastics manufacturer and these new LCD screens will add $50 million to his sales. If his sales before are only $10 million, that's brilliant news.

But what if the manufacturer is a multinational corporation with sales currently at $2 billion. Clearly, in this case the increase of $50 million would have less of an impact on the bottom line, and on the future share price.

The manufacturer of the LCD screens, that owns the rights to them, will no doubt benefit from an increased surge, but the problem is, perhaps that's already impacted in the share price?

One was to get an indication is looking at the Price/Earnings (P/E) ratio.

This ratio gives you an indication of the market's expectations regarding future earnings growth of this company as compared to its earnings last reporting period.

A high P/E ratio indicates the market expects high growth.

A low P/E ratio indicates the market expects low growth compared to the last reported earnings.

The supplier that supplies the materials to this company will benefit provided there are certain safeguards in place to ensure it will keep the business. This could be contracts, a better technology, existing relationships, partial ownership by the other company, and so forth.

As you go down the supply chain, perhaps this level of certainty diminishes -- it needs to be looked into, in any case.

Let me deviate for a moment to talk about stocks that "arouse excitement".

Some stocks are exciting. Microsoft, Yahoo, Oracle, Redhat. Even Coca Cola to some extent. These are companies everybody knows about, and chances are, many analysts follow them closely. What this means for you is that, chances are, it will be harder to find bargains amongst these stocks. It's definately not impossible, but it is harder.

My preference, and this doesn't have much fundamental theory behind it, is to look at stocks that have between zero and two analysts looking at it. If none or only a small part of it is owned by institutions, great.

So definately, look closely at that penny stock. :)

- Thomas.

> Thanks Thomas,

> Bear with me on this...just thinking aloud.

> Compare a folding LCD monitor to a clear
> plastic bag with a few drops of oil in it.

> Then when the "charge" is sent
> through the oil, all the little pixels line
> up properly and you have a monitor screen.

> Now, lets say the "plastic bag"
> part of the monitor is made down the street
> and has a proprietary position on the
> bag...and is under contract to be the ONLY
> supplier to the folding screen company,
> which has a little (if there is any such
> animal) VC money behind it...

> The 'baggie' company is a small publicly
> traded but in the 'penny stock'
> category...doesn't arouse much excitement.

> OK...now in order for the baggie company to
> make their foldable monitors, before the
> Folding Monitor company pours in the
> "oil"...to make it work...

> the baggie company has to buy a certain high
> grade polymer that is used in making the
> baggie...

> that company is traded on the Tim Buk Tu
> market...and you can probably get a hefty
> part of it for the cost of a good dinner.

> Further back the chain is a chemical company
> that has to supply a certain dye to make
> sure the polymer is "clean" before
> it gets shipped to the baggie
> company...before they can send it along to
> the Folding Monitor company who will be
> supplying Apple and Compaq and HP and Sony
> (just as an example)...

> the folding monitors for the PDA's that we
> will carry around in our holsters ready to
> draw and "put or call" at a
> moment's notice...even on the 14th green,
> much to my annoyance..

> Anyhow, that is a "chain" of
> production.

> Analyzing the chain, you might discover that
> the least disturbed "link" might
> be the chemical company, which doesn't have
> to add people or expenses to meet increased
> demand...they just make bigger batches of
> the stuff they need...same people doing
> it...they simply make more of it...

> The other's up the chain, in ANTICIPATION as
> you say of striking gold have already (in
> this hypothetical example) begun capital
> expenditures to meet the demand, if it
> arises.

> So, in my uneducated investor mind...I'd
> want to put some "risk" capital
> NOT into the Folding Monitor company...but
> into the small Penny Stock Chemical company
> which has a 75 year history of supplying,
> first the Tire industry, and now the Polymer
> industry with first rate and MODEST profits
> service...

> But, if the chances of the Folding Monitor
> Company have a take over possibility and a
> stock split with preferences...and there is
> that opportunity too....might be wise to
> cover my assets throughout the chain???

> Thanks Thomas for helping out...I'll get the
> books you suggest and start studying.

> Gordon Alexander

Thomas, you've made some very valid points when you say:

> Let me deviate for a moment to talk about
> stocks that "arouse excitement".

> Some stocks are exciting. Microsoft, Yahoo,
> Oracle, Redhat. Even Coca Cola to some
> extent. These are companies everybody knows
> about, and chances are, many analysts follow
> them closely. What this means for you is
> that, chances are, it will be harder to find
> bargains amongst these stocks. It's
> definately not impossible, but it is harder.

> My preference, and this doesn't have much
> fundamental theory behind it, is to look at
> stocks that have between zero and two
> analysts looking at it. If none or only a
> small part of it is owned by institutions,
> great.

As a rule, we only buy those stocks that are either being covered by analysts, or that the big institutions have holdings in.

A good case in point is the proposed merger of AOL and Time Warner. AOL was the first stock I owned. Many investors' favourite. Several analysts know of it and cover it and many institutions own it. I did well on it and instead of selling all my shares at a nice profit, I sold half and held off on the balance because I wanted to hold some shares for the long term, take advantage of it's annual splits and just keep replaying it.

Last year when the proposed merger was announced, I watched my profits dwindle. Becuase we had a proposed announcement merger of new and old technology, and different P/E earnings for each company, analysts needed lots of time to properly evaluate the worth of the merged companies. And when they finally announced their findings, independent analysts from both companies got more than their share of press. For 2 days, this was the bulk of news that CNBC carried during it's trading hours.

And many who had dumped the stock again jumped on the bandwagon and scooped up AOL because the news was favourable. Unfortunately, I could not stand the wait and took a loss. But I'm still glad that I did, as I had no idea if/when we would ever see the high P/E that AOL is known for delivering. And of course, the merger may never go through. In which case, AOL shareholders will be thrilled at the news.

So, basically, all the stocks in my portfolio that have done well, have been those that have analysts covering them or are part of indexed funds, like the Merryl Lynch holders. The others, often the penny stocks, don't get promoted, so noone knows about them.

Investors are so fickle nowadays, do you want to be on the winning side of the fence or the other side.

I'd love to invest in some banking and mining/petroleum stocks, but they just don't get much coverage. In fact, several years ago I worked for a large gold mining group of companies and have always wanted to get back into owning some gold mining penny stocks. I did invest a few hundred in one. It's doing so poorly, I don't even look at it. I keep this loser because it's an over the counter stock, and the cost of selling would be more than the stock is worth. But who knows, the company could strike gold and my .30cents shares could be worth $40 in a few years. In my circle of friends, back in the mid-late 70s when the price of gold was going through the roof, I used to hang out with mining geologists. These guys made a killing. They bought into some of these young mining exploration cos. and many became relatively wealthy over a few years. Nowadays, we just don't see this happening in other sectors, other than tech.

Eliz.