VOLUME 01: ISSUE 08 Dow Jones 9,545.17 + 82.27 7:40 pm EST, Fri., October 26, 2001 NASDAQ 1,768.96 -  6.51 For info, visit access.smallcapnetwork.com S & P 500 1,104.61 + 4.52 To be removed, please click here. Russell 2000   438.65  + 2.69   Dear SmallCap Network Members: Wall Street pros continue a rather heated debate over market valuations, with battle results unfolding with each and every twist and turn of the popular averages. Are price-to-earnings (P/E) multiples on the broad market still too high? We continue to do considerable research on this subject, and have some good news and bad news to report. Let's get the bad news out of the way first. By historical measures, current broad market value remains relatively high. The P/E ratio on the S&P 500 has averaged 15 times earnings over the past 40 years. Today, the earnings multiple on the S&P 500 stands at just over 29 times and is projected at 21 times next year's consensus earnings forecast. At the recent September 21 low-water mark of 965.80, the P/E multiple on the S&P 500 got down to 25.6 times, still well above the 40-year average. What most Wall Street firms are reluctant to tell is the fact that the average P/E multiple at bear-market bottoms over the past 50 years has been 11 times earnings.  This is hardly reassuring if you consider yourself more bull than bear. That's as far as we're going with the bad news. Suffice it to say we are reluctantly bullish, so let's get to some good news. First, the five-year high P/E multiple on the S&P 500 was 50.16. (We were unable to confirm this, but believe this could represent an historic all-time high.) Fortunately, this P/E multiple was achieved at about the same time many fledgling (and now-defunct) Internet start-ups were trading at 50-100 times SALES not earnings. The low P/E multiple on the S&P 500 was 17.48 times earnings a full five years ago. The broad market was in an advance that saw it double from October of 1996 to March of 2000 before crashing 40% from its peak. The P/E on the S&P was cut in half by the time it hit its September 21 low. While there continues to be downside risk, this has to be considered pretty good news going forward. The good news for individual investors doesn't end there. Over the past 40 years inflation has run at an average of 4.4% but is holding steady at 2% today. The average yield on 10-year Treasury notes during the same period is 7.3% but today the yield is down to just 4.6%. Combine this with the fact that money market funds hold around $2 trillion in cash (versus an $11 trillion total market capitalization) and the outlook for stocks begins to brighten just a bit. Whether P/E's continue to contract, hold steady, or expand is really a function of earnings performance going forward. Estimates for 2002 earnings on the S&P 500 have continued to contract as the economic slowdown drags on. The challenge for the 500 companies that make up the S&P average will be to beat those reduced estimates next year. With the threat of inflation under control and interest rates at a 40-year low, large-cap corporate America has an excellent foundation to produce some positive surprises next year. The challenge for the individual investor is to find opportunities for growth in a marketplace littered with growth-stock casualties. This is also why many Wall Street professionals have singled out micro and small cap value stocks to out-perform the broad market over the next 12-18 months. Why? Because they are under-followed and many of them are considerably undervalued! AN UNDER-VALUED MICRO CAP STOCK IN REVIEW One company we've uncovered that represents a solid speculative micro cap value is M-Wave, Inc. (NASDAQ: MWAV.) MWAV manufactures microwave frequency components and high-frequency circuit boards using Teflon-based laminates. These products are widely used in variety of applications for wireless telecommunications and Internet service products. For the six-month period ending 6/30/01, MWAV's revenues totaled $38 million up from $17.3 million while net income rose to $2.8 million from $926 thousand. With no known analyst coverage, MWAV is trading at a market capitalization of about $19 million--just 1/3 of last year's $57 million in revenues. Even more intriguing from a valuation standpoint, MWAV currently trades at 3.28 times trailing 12-month earnings and just a shade over 1x book value. The Company announced revenues were on track to exceed last year's levels, and they project $100 million in revenues in the next two to three years. Some investors may shy away from companies in this group because they have been pummeled over the past year and a half. Regardless of its past performance of its stock price, MWAV's revenue growth is projected to grow by over 75% in the next two to three years. MWAV shareholders have excellent upside potential from current levels. In fact, according to the NASDAQ, three new institutional shareholders have reported adding new positions in MWAV over the past six months. The fundamentals look pretty solid going forward. Let's take a look at the technical outlook. The chart below highlights MWAV shares trading at a $15 high as late as February. When the market peaked in 2000, MWAV shares hit an all-time high of $16.94. MWAV hit a closing yearly low of $3.70 on September 20, 2000. Shares of MWAV represent a very good value for speculative investors at current levels. Downside risk of about 15% appears to be buffeted by the $3.80 book value of the Company. The $19 million market cap represents just 20% of anticipated forward revenues of $100 million whether it takes two to three years get there. We believe MWAV has an excellent opportunity to hit their revenue goal and see their market cap expand to 1x revenues at some point in the next two to three years. In fact, if the Company were to reach a revenue valuation of 1x on a trailing basis, a 300% return from today's closing price would be realized. On a worst-case scenario, MWAV shares appear to hold 15-20% downside risk. The SmallCap Network believes MWAV has an excellent chance to retest its all-time high IF they achieve the revenue results they have publicly stated they are targeting. With 4.57 million shares outstanding, achieving a $100 million market cap would produce a $21.88 share price at some point in the next two to three years. In our view, 400% upside potential versus 20% downside represents a risk/reward scenario (20-1) we are perfectly willing to live with regardless of whether the broad market is over, under, or fairly valued. We'll look forward to presenting more of these types of situations in the weeks and months ahead. SmallCap Network Members are advised this is neither an offer to sell nor a solicitation to buy securities. Members are advised to perform their own due diligence and use caution when buying andselling micro and small cap stocks. If you'd like to update, change, or add a new email address please click here.   D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from third party consultants and/or companies which it features for the publication and circulation of the SmallCap Digest or representation on SmallCapNetwork.net.  Likewise, this newsletter is owned by TGR, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication. Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://access.smallcapnetwork.com/compensation_disclosure.html for our full compensation disclosure and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts compensation and disclosure. All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The editor, members of the editor's family, and/or entities with  which the editor is affiliated, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication. The profiles, critiques, and other editorial content of the SmallCap Digest and SmallCapNetwork.net may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READER SHOULD VERIFY ALL CLAIMS AND DO THEIR OWN DUE DILIGENCE BEFORE INVESTING IN ANY SECURITIES MENTIONED. INVESTING IN  SECURITIES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS PROFILE IS PROTECTED BY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCED IN ANY WAY WITHOUT THE EXPRESSED, WRITTEN  CONSENT OF THE EDITORS OF SMALLCAPNETWORK.NET. We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.govand/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.