Senior analyst: Adam Lowensteiner (12/9/99)
Have Internet stocks gotten you dizzy? Well sit back and enjoy the ride, because it might be a long one according to Jeffrey Applegate, Chief Investment Strategist at Lehman Brothers. 'In a word we are still bullish,' he said.
Applegate believes that the markets should continue their trend upward, thanks to technology, and he also believes that the Fed is no longer on its 'warpath' of raising rates like it has in the past.
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Applegate continues to promote investing in stocks, and has had zero percent of his portfolios in cash for the past five years.
'If there is no recession through February, we could see the largest expansion the United States has ever seen,' noted Applegate.
Applegate believes that there has been sustained deflation in our economy, as labor wages have been rising by 3%, but that technological advances, which in some cases have replaced employees with machines, have also lowered total labor costs to the economy. Another catalyst to this bull market is that 60% capital expenditures in the economy are being spent on technology, a huge increase from 30% a few years ago.
Yahoo! (NASDAQ: YHOO - Quotes, News, Boards), which soared Tuesday on news of its inclusion into the S&P 500, is also something that intrigues Applegate. With companies like Yahoo! and America Online (NYSE: AOL - Quotes, News, Boards) entering the S&P 500, they will lift the index's price-to-earnings ratio.
Applegate adds that by adding these non-dividend paying technology stocks to the index that old valuation methods that looked at dividend growth or book value will become increasingly meaningless. 'Higher growth rates plus higher margins will equal higher price-to-earnings ratios,' says Applegate.
At Lehman Brothers, Applegate produces a strategy portfolio, where he is overweighted in technology stocks nearly 2-to-1 in comparison to the S&P 500, pushing stocks like America Online (NYSE: AOL - Quotes, News, Boards), Lucent Technologies (NYSE: LU - Quotes, News, Boards), Siebel Systems (NASDAQ: SEBL - Quotes, News, Boards), and Sun Microsystems (NASDAQ: SUNW - Quotes, News, Boards).
Applegate also favors capital goods stocks like General Electric (NYSE: GE - Quotes, News, Boards), and communication services like AT&T (NYSE: T - Quotes, News, Boards) and MCI WorldCom (NASDAQ: WCOM - Quotes, News, Boards). Applegate is underweighted in basic materials, consumer cyclicals, consumer staples, energy, financials, healthcare, transportation, and utilities.
'Virtual Economy Portfolio'
Because the Internet has become such a large part of the market, Applegate constructed what he calls the 'Virtual Economy Portfolio.' This portfolio obviously carries more risk, but as more and more Internet stocks get placed into the S&P 500, investors will likely continue chasing these types of stocks.
There are not enough Internet stocks in the S&P 500 Index to compare a portfolio weighting to, so Applegate uses the Dow Jones Internet Index.
In the virtual portfolio he is overweighted in infrastructure stocks like Cisco Systems (NASDAQ: CSCO - Quotes, News, Boards), JDS Uniphase (NASDAQ: JDSU - Quotes, News, Boards), and application and services stocks like Critical Path (NASDAQ: CPTH - Quotes, News, Boards), Phone.com (NASDAQ: PHCM - Quotes, News, Boards), and RealNetworks (NASDAQ: RNWK - Quotes, News, Boards).
On the underweight side, Applegate says intermediary stocks like CMGI (NASDAQ: CMGI - Quotes, News, Boards) and Ariba (NASDAQ: ARBA - Quotes, News, Boards) and e-commerce stocks like Amazon.com (NASDAQ: AMZN - Quotes, News, Boards) and Priceline.com (NASDAQ: PCLN - Quotes, News, Boards) should be less of one's portfolio.
Of the 34 stocks in the virtual portfolio, Applegate favors Cisco Systems (NASDAQ: CSCO - Quotes, News, Boards), MCI WorldCom (NASDAQ: WCOM - Quotes, News, Boards), VerticalNet (NASDAQ: VERT - Quotes, News, Boards), and America Online (NYSE: AOL - Quotes, News, Boards).
Of the stocks that overlap and appear in the Virtual Economy Portfolio and the Dow Jones Internet Index are: Cisco, MCI WorldCom, America Online, Siebel Systems, EMC (NYSE: EMC - Quotes, News, Boards), Intel (NASDAQ: INTC - Quotes, News, Boards), Lucent, Sun Microsystems, Nextlink (NASDAQ: NXLK - Quotes, News, Boards), Microsoft (NASDAQ: MSFT - Quotes, News, Boards), Qwest Communications (NASDAQ: QWST - Quotes, News, Boards), and Tellabs (NASDAQ: TLAB - Quotes, News, Boards).
Bottom Line:
So far Applegate has been dead on with his analysis. Another catalyst he highly believes will take some of these stocks even higher is the increase in bandwidth. Applegate doesn?t know which technology will win, but he does believe that infrastructure companies are still the place to be as they will be building the backbone to the Internet. Which are those stocks? The Lucents, Ciscos, AT&Ts, MCI WorldComs, and Sun Micros, as well as the JDS Uniphases, RF Microdevices, and Brocade Communications of the world. |
