To everybody,
I thought this was extremely appropriate to be printed here at this site. Sorry in advance for the length but I wanted to get it all in. The only editing I have done is to make bold what I consider is the crux of the article.
Bernie
Jubak's Journal
Half a strategy is worse than none
Making money in this volatile market means buying and selling. My near term strategy tells me to buy JDS Uniphase and
Network Appliance now. We'll get to the selling later.
By Jim Jubak
By the end of this column, I'll have all the cash I took out of the market over the last few weeks back in. Jubak's Picks will be fully invested
again.
But before you follow my strategy -- indeed, before you follow any strategy -- you need to answer two questions.
1.Does the strategy seem like a good one to you? I've laid out the thinking and the timetable behind my
strategy pretty clearly in columns such as "Finding the upside in an up-and-down market" and last
Friday's "Just your typical 3-day correction?" So you can decide for yourself whether my plan makes
sense or not. It clearly doesn't if you believe that the huge recent rally in the Dow Jones Industrials Index
($INDU) and in blue-chip growth companies such as General Electric (GE, news, msgs) and Wal-Mart Stores (WMT, news,
msgs) will continue. I don't -- I think the rally in these stocks won't have any more legs than the January rally in this same group.
Whether you agree or disagree with me, that's the sort of issue you ought to be thinking about before you adopt any strategy.
2.Will you be able to execute all the parts of the strategy? My plan for making money in this very volatile market requires an investor
to buy technology stocks when they're in the dumper and to sell them -- or at least some of them -- when it seems like they can do
no wrong. That's buy and sell. Executing just half of the strategy won't work -- in fact, it's probably better to execute none of it than
to follow just one part of the plan.
Although I've written enough about the first of these two questions, I haven't dealt with this second issue at all. And it's an important one for
any investor following any strategy. In my opinion, more strategies blow up because investors can't execute the whole plan than because
the strategy was misconceived in the first place.
So how do you go about answering this second question for yourself?
Personally, I use a visualization exercise. The process gives me some insight into what actions I'm going to have to undertake to execute
the strategy I've got in mind and lets me study the consequences of those actions. And it also helps me project how I'm going to feel about
doing what the strategy requires. That may sound kind of vague, but I assure you it's actually pretty concrete. Let me use the current
market and my current Jubak's Picks strategy to show you what I mean.
Buying with bravery
I don't think it takes a great deal of imagination to visualize how buying feels when everybody else is running for the hills. We're in that
phase of the strategy and the market right now. To know what it feels like, all you have to do is think back to last week. Still, I think there
are a couple of points that need to be stressed about buying in this market.
For one, the drops are really fast and they're often appallingly huge. At the end of the session on Wednesday of last week, I was looking at
drops of $24 in Network Appliance (NTAP, news, msgs), $25 in RF Micro Devices (RFMD, news, msgs), $21 in Applied Micro Circuits
(AMCC, news, msgs) and $32 in PMC-Sierra (PMCS, news, msgs). Anybody who can shrug off a $25 a share drop in a day is made of
sterner stuff than I am.
But this kind of free fall in the prices of stocks that have zoomed the fastest and farthest is exactly what you should expect in the current
market. Margin debt is at record levels, and that means that many of the investors who own these highfliers have bought them with
borrowed cash. Since those loans are secured only by the value of the stocks themselves, when the market heads down, the collateral on
the loans is no longer worth enough to secure the loan. Then brokerage firms send out margin calls. Investors don't have much time to meet
a margin call -- just until the end of the day. And very few investors cough up new cash, choosing to sell some of their shares instead. The
result is massive, forced selling into a falling market, which triggers more margin calls. No wonder that in a market with such high levels of
margin debt, declines are steep and fast.
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It's possible that
circumstances will
change and the
smart thing will be
to revise my
strategy before I get
to the "sell" phase
in May. To get to
that point, though,
I've got to finish the
"buy" phase right
now.
That does have a good side, I guess. It means that the selling quickly reaches a climax. No dithering about whether to hold out for another
day to see if the decline reverses. When the call comes, you sell.
The downside to this way of reaching the downside of stock prices is that it's very hard to call the turn. Stocks aren't building bases here or
finding support levels. Chart patterns don't build up over the course of weeks. The best indicator is a kind of gut feel that the selling has
reached excessive levels.
Jumping in quickly
And an investor doesn't have much time to make the call to jump back in, either. Once the forced selling and the panic selling end, stocks
can start to bounce back very quickly. A sell-off -- even a 10% correction -- that lasts just a few days or a week isn't long enough to have
any real effect on investor psychology or behavior. After a bloody but compressed correction like those that have characterized this market
to date, you can expect investors to crowd back in almost immediately.
That's why I made two picks in Friday's Jubak's Journal and why I'm making two more -- JDS Uniphase (JDSU, news, msgs) and Network
Appliance -- today. The rally from here could be quite explosive.
That's only my best estimate, of course. Maybe this isn't the bottom of a quick tumble. Maybe prices will go lower. Maybe we're seeing the
beginnings of a major switch back to blue-chip growth stocks. All those thoughts have been rolling through my head even as I put my "buy"
strategy into motion. And that's why executing this part of my strategy feels scary -- like jumping into a lake in the dark, like going into a
long-abandoned room without turning on the lights, like jumping off a bridge and hoping the bungee cord holds.
And buying has always been the easiest half of any strategy for me.
Sell on the upswing
I really prefer not to look out six weeks or so to the "sell" part of this strategy. I know from experience that it will be difficult to execute. But
if I don't make sure that I'm committed to selling when the time comes, I shouldn't try to execute this strategy at all. If I can't sell in May as
my strategy now requires, I'd be better off just sitting in cash until the volatility of this market eases sometime after the Federal Reserve
meeting in late June.
I found it hard to sell in February and March in order to bring Jubak's Picks to about 20% cash. It's always difficult to sell into a rising
market, even though that's exactly when you should be selling. I second-guess myself endlessly each time a stock I've sold keeps climbing
-- which, of course, is what most do, since I'm selling into a rally.
And it's so very easy to justify holding onto a stock for another week or for another 10 points. Since this market has been so overvalued for
so long, it's easy to get used to just staying in. Once you've made profits buying a stock with a price-earnings ratio (P/E) of 700, what's to
fear from a move up to a P/E ratio of 800 or even 1,100?
I also find it very easy to delude myself into staying in until I see the true danger sign. Of course, this market has left most of the historical
danger signs behind, somewhere near the time when the Nasdaq crossed 4,000 (or was it at 3,000?). It's tempting to wait until I can identify
the precise trigger of a decline, but it takes so little to trigger a fall in a market trading at these levels that the trigger may be hopelessly
trivial and hence impossible to foresee. What, precisely, triggered the correction that began last Monday, March 13, for example?
So I can't say that I'm looking forward to May when, according to my strategy, I'll have to do another bout of selling. I was able to move 20%
to cash in February or March, however, so that gives me some confidence that I have the discipline to do what's necessary. But I'm also
expecting May to be harder, since I now think that I'll move a bigger part of the portfolio to cash then.
I've found that if I set a concrete goal, it helps me achieve my objectives. Right now that goal is 33% cash in May -- if the market rallies
between now and then, if the summer still seems so very risky, and if my strategy still seems to make sense to me. Lots of ifs to keep an
eye on. This market is sufficiently volatile that it's not a good idea to put any strategy on autopilot.
It's possible that circumstances will change and the smart thing will be to revise my strategy before I get to the "sell" phase in May. To get
to that point, though, I've got to finish the "buy" phase right now.
Jubak's Archives
Recent Jubak articles:
? Just your typical 3-day
correction?, 3/17/00
? Is Qualcomm ready to
bust out -- or just a bust?,
3/14/00
? What's the future worth?,
3/10/00
More?
Buying a hot sector
Frankly, when I looked at my "10 stocks to buy later" watch list (see my columns of Feb. 8, Feb. 11 and Feb. 15), I was torn between
buying JDS Uniphase and GlobeSpan Semiconductor (GSPN, news, msgs). This should be a great year from GlobeSpan as the market
for digital subscriber line (DSL) technology continues to accelerate. But I finally decided to go with JDS Uniphase because the long-term
picture for optical networking is just as strong as that for DSL. And the near term may be even stronger. On March 16, Corning (GLW,
news, msgs), a maker of fiber-optic cable, told Wall Street that earnings for the quarter ending in March would exceed analyst projections
of 48 cents a share by between 5 cents and 7 cents. That's an extra 10% to 15% growth that Corning attributes to heavier-than-expected
demand for optical-fiber cable.
Given how optimistic projections of demand in the optical business have been, that's a pretty impressive jump. So I'm adding to my
weighting in the optical-networking sector by putting JDS Uniphase into Jubak's Picks.
Among the technology stocks that aren't on this list that I mentioned in my last column, I'm going to give the nod to Network Appliance for
much the same reason. Going into this period, which is likely to be focused on earnings stories, I want to pick stocks that have a good
shot at outdistancing already-positive Wall Street projections. Given the new business win-rate the company has demonstrated recently, I
think analyst estimates of 75% revenue growth year-over-year are likely to be low. And the price is attractive -- the stock recently sold for
about 25% off its 52-week high. I'm adding Network Appliance to Jubak's Picks. (Network Appliance is set to split 2-for-1 on March 23.)
This is my last column before I go on vacation for a week. During my absence, this space will be filled with columns that I wrote before I left.
But I won't be answering e-mail or posting in the Market Watch community until I'm back in the office on March 27.
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Buy JDS Uniphase (JDSU, news, msgs)
JDS Uniphase (JDSU, news, msgs) has come out of nowhere to stake a strong claim as the gorilla of the fiber-optic networking business.
Thanks to an aggressive round of acquisitions, the company has emerged as the one supplier with the ability to deliver a full range of active
and passive components to companies building optical networks. The company has to meet some lofty expectations on Wall Street, but
demand in the optical-networking sector is running ahead of even current optimistic forecasts. I'm adding JDS Uniphase to Jubak's Picks
with an October target price of $180 share.
Buy Network Appliance (NTAP, news, msgs)
Anyone who owns a house or apartment knows you can never have too many closets. And on the Internet, you can never have too much
storage. Network Appliance's (NTAP, news, msgs) dedicated storage appliances have been winning big when it comes to applications
such as electronic commerce and speeding up the basic infrastructure of the Internet itself. The stock (a former Jubak's Pick from the
second quarter of 1999) fell more than 25% during the mid-March technology rout, giving investors a chance to enter before the company
reports what is shaping up as a great quarter. I'm adding it to Jubak's Picks with an October target price of $253.
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Updates on Jubak's Picks Stocks
5 stocks to 'disrupt' a lagging portfolio
In all the hubbub, nobody paid much attention to the big deal Puma Technology (PUMA, news, msgs) announced with Lycos (LCOS,
news, msgs) on March 15. Lycos will use Puma's alert technology and Puma's newly-acquired personalization technology to automatically
notify Lycos users of changes in Internet content in their areas of interest. Notification can be through PC, handheld, wireless phone or
pager. I think this is a solid win for Puma that should help the company land other high-visibility clients.
Is Qualcomm ready to bust out -- or just a bust?
The votes ran more than 2-to-1 in favor of "bust out" when I asked the question in my March 14 column. More than 2,300 readers voted, and
69% of those are looking for the stock to come roaring back after the traditionally weak March quarter.
Jubak's Picks
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: GlobeSpan
Semiconductor, Network Appliance, JDS Uniphase, PMC-Sierra, Puma Technology and RF Micro Devices.
Investor's editorial goal is to provide a forum for investment ideas. Our articles, columns, and other features should not be construed as investment advice, nor does their
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