another long time bear getting bullish
This Longtime Bear Jumps Back Into Tech
>
> By Thomas Kurlak
> Special to RealMoney.com
> 10/31/2002 01:16 PM EST
> Click here for more stories by Thomas Kurlak
>
>
> It's not too early to get ready for the next up cycle. I'm now starting to
> build positions -- specifically, in semiconductor and cell-phone stocks.
> Remember that this down cycle in tech started in cell phones, then went to
> personal computers and lastly affected telecom equipment. For the past few
> months, I've been seeing a pickup in cell-phone sales, which Nokia
> (NOK:NYSE
> ADR - news - commentary - research - analysis) recently confirmed.
>
> Soon, I expect we'll be hearing about better PC sales. They usually pick
> up
> at year-end, and despite weak consumer sentiment, I expect the same thing
> to
> happen this year because of the length of this slowdown and better product
> pricing. Perhaps as more capacity is burned off, we may even hear of
> improving telecom sales by late 2003.
>
> With tech now broadly shunned by investors and most observers and analysts
> positioned for more bad news, now is probably a good time to begin leaning
> into the negative consensus. And the best way to do that is with
> semiconductor stocks: They supply parts to all tech sectors, so they can't
> miss a recovery, no matter where it starts.
>
>
> Leading the Way
> For my money, Intel (INTC:Nasdaq - news - commentary - research -
> analysis)
> will lead again in this cycle because of its superior management and
> balance
> sheet and its still-high profitability. (It's had a 10% net margin in a
> recession.)
>
> Despite the poor reception that Intel's third-quarter earnings initially
> received from the Street, I was encouraged by its very good inventory
> control. In fact, I was aware of inventory buildup over the summer, which
> was worked off by quarter-end. This caused the gross margin to decline
> below
> 50%, as wafer starts were cut back and the factories ran at lower output
> levels. But Intel shows good cost control and is poised for strong
> gross-margin improvement on higher sales. Plus, a PC replacement cycle is
> overdue.
>
> Applied Materials (AMAT:Nasdaq - news - commentary - research - analysis)
> is
> completing its fiscal fourth quarter this week, and results will be
> depressed as expected. More layoffs are likely soon, too.
>
> But Applied Materials lags the cycle, as does any capital-goods company.
> As
> the No. 1 semiconductor capital-equipment supplier in the world, Applied
> Materials just can't miss a new semi cycle. I think problems at the big
> foundry customers in Taiwan are overplayed as a negative: It appears that
> these chipmakers are beginning to lag somewhat on new technology
> implementation due to the severity of the downturn. But this means only
> that
> the integrated manufacturers will need to do more of their own investments
> in new capacity. Too much concentration of capacity in Taiwan isn't good
> for
> the industry anyway.
>
> With semiconductor inventories low going into the fourth quarter and wafer
> starts being cut, it seems certain that lead times will increase. Once
> lead
> times go out, orders will jump quickly as customers move up their buys to
> prevent an out-of-parts condition.
>
>
> The Wireless Connection
> I don't follow Nokia as closely as Intel and Applied Materials, but the
> company has clearly retained its No. 1 worldwide position. Its newest
> phones
> are quickly catching on with consumers just in time for the holiday
> shopping
> season. The phone with a built-in camera that can send digital pictures by
> email wirelessly is going to be a big seller this year.
>
> The worry about when third-generation technology takes off isn't too
> important right now, because 2 1/2 G is starting to carry the load anyway.
> What matters most is that the handset market is getting off the 400
> million
> plateau and growing again. Most importantly, it's becoming apparent that,
> in
> the telecom world, wireless wins in the long term. For the first time that
> I
> can remember -- and perhaps ever -- the number of phone lines into homes
> is
> decreasing. More people are adding phones by going wireless, and in-home
> wireless networking adds to demand for the technology.
>
> Valuations are now a stumbling block for investors looking at tech. But
> earnings multiples are always highest at cycle lows, so look at
> price-to-sales. Here we see that Intel, Applied Materials and Nokia
> recently
> fell to the 2-3X range, associated with bear-market lows in the past.
>
> So, after a year and a half without tech in my portfolio, I'm getting back
> in. I'm looking out three to five years for three to five times my money.
> I
> see this period as another one of those great opportunities that come
> along
> in the market every decade. |
