Better Days Coming (Mostly) for Stocks
--From AOL.-- Cooters
BUSINESS WEEK ONLINE
June 26, 2000
Better Days Coming (Mostly) for Stocks
S&P's David Braverman looks beyond recent earnings disappointments and sees a higher S&P 500 index by yearend
Not to worry about corporate earnings, despite the disappointments in some recent announcements. That's the view from David J. Braverman, senior investment officer of Standard & Poor's Equity Investor Services. He points out that this is now almost the end of the "confession period," when downside earnings surprises are disclosed -- and that from now on reports will be more positive.
For this and other reasons, he's optimistic -- though cautiously so -- about the market for the rest of the year. And he sees the S&P 500 index higher by yearend.
Among interesting changes in S&P stock rankings, he cites the addition of electronics manufacturer Vishay Intertechnology and the upgrading of Laboratory Corp., with its system of testing for hepatitis C.
Braverman was the guest in a June 20 investment chat on America Online presented jointly by Business Week Online and S&P Personal Wealth. Here are edited excerpts from the chat, with Braverman's answers to some of the questions asked by the online audience and by the moderator, Jack Dierdorff of BW Online. A full transcript is available from BW Online on AOL, keyword: BW Talk.
Q: David, do you [and S&P] see any clear trend in the present market?
A: We're cautiously optimistic going forward. The economy, although slowing, is still strong. And we see higher levels for the S&P 500 by yearend and into 2001.
Q: What will the market do if the Fed adds 25 basis points -- or there's no rate hike -- next week?
A: We think more of the same. The market will then start focusing on the good earnings results that will come in July. Either way, the market should, at that point, get past its interest-rate jitters and start focusing on earnings.
Q: So despite some earnings disappointments recently, you think the earnings outlook is good?
A: Exactly. We're at the point of the season that's the "confession period," when companies give warnings about poor results. The companies that are going to release strong results have yet to speak.
Q: Now to specific stocks. Has Qualcomm [QCOM] hit bottom?
A: We're probably pretty close. Last week, we got the news about South Korea banning use of subsidies for domestic sales of wireless phones. But while short-term earnings may be pressured, QCOM should be able to capitalize on the move to broadband wireless, so we would take the recent drop as an opportunity to accumulate.
Q: What are your thoughts on CPQ [Compaq] and DELL?
A: Dell continues to come in with good numbers. First-quarter earnings were above our estimates, and you've got to be impressed with 31% revenue growth. So we would still accumulate. We also like Compaq, at 22 times our $1.35 2001 estimate.
Q: The future of Lucent [LU]?
A: Lucent's future is pretty bright. And we currently have a strong "buy" recommendation on the stock.
Q: Your thoughts on AOL as a long-term investment?
A: Obviously, AOL is here to stay. And we continue to recommend accumulation of the stock. We continue to be impressed with how fast they add subscribers on top of an already huge base. The merger with Time Warner [TWX] should be completed in the fall, making AOL a core Internet holding.
Q: Thoughts on WorldCom [WCOM]?
A: WorldCom is currently our favorite play in the long-distance telephone market. They also have strong exposure to the Internet.
Q: What are the prospects for SBC in the long-distance war?
A: We like SBC -- but not necessarily because we think that they're going to be a dominant long-distance provider. One of the things we really like about SBC is that they are aggressively rolling out DSL service. We would accumulate the stock.
Q. And still in telecom, would you buy AT&T [T] at the present price?
A: Yes. And we think that the market doesn't fully recognize the growth potential in a package of telephone, cable, and data services for sale to residential customers. We would also accumulate AT&T.
Q: Which are the good stocks for day trading?
A: I guess "hold" doesn't apply in that kind of environment. Rather than make a specific recommendation, I would point out that our emphasis is on "buy and hold" investing, with a time horizon of 6 to 12 months. But many of our recommendations on our 5-STAR list can be actively traded. Some of the names we like include Cytec [CYT] and Vishay Intertechnology [VSH].
Q: But isn't this kind of market dangerous to the health of momentum investors, including day traders?
A: I'm assuming this person is one of the 20% who can consistently make money this way -- as opposed to the 80% who generally get washed out. Enough said.
Q: What sectors do you see leading the market into 2001?
A: Pretty much what we're seeing right now -- a combination of technology, financials, and energy, being helped out a little bit by health care.
Q: At 67 years old, is an S&P [index] fund still a good bet?
A: Of course. Index investing gives you great diversification at low cost. And you're guaranteed to consistently outperform the 75% of money managers who manage to miss their benchmark. What's wrong with that?
Q: First-timer here -- what would you recommend with $5,000?
A: Let's go back to the 67-year-old asking about index funds. Somebody starting with a relatively small amount of money is tailor-made for an index-fund investment. One good way of investing in the indexes is through the "spiders" traded on the American Stock Exchange. The S&P 500 can be bought with ticker symbol SPY, and the Mid-Cap 400 index can be purchased with ticker symbol MDY. This gives initial exposure to the stock market, but without the risk from owning only one or two stocks. This way, you own hundreds of stocks.
Q: You mentioned the S&P 5-STAR list -- some other highlights, including any recent additions?
A: Some of our most recent additions include Vishay, an electronics manufacturer with terrific management and strong growth prospects. We also have upgraded Laboratory Corp [LH]. LH acquired the leading provider of hepatitis C testing, National Genetics Institute.
Q: What stocks would you recommend for dividends?
A: One company that we like is Williams [WMB]. The yield is only 1.4%, but we see good growth going forward. A more traditional yield play might be FPL Group [FPL]. The company has a current yield of about 4.5%.
Q: Is this the time to buy gas and oil utilities?
A: Not a bad idea. The two that we like are Enron [ENE] and Williams, which we [just] mentioned.
Q: What are your best [Net] infrastructure plays currently?
A: Some names that we would look at in infrastructure include WorldCom, Cisco Systems [CSCO], Extreme Networks [XTR], and Covad Communications [CPVD].
Q: We've had several questions on Oracle [ORCL], which you haven't mentioned yet.
A: Well, it's not because there's anything wrong with Oracle. Everything keeps moving along, and both database and application-license revenues continue to grow strongly. At the same time, their margins are surging. The stock is not cheap, but the strong EPS growth should continue. So we would continue to accumulate the stock.
Q: What do you think about HON [Honeywell]?
A: We have a "hold" on the stock. This is another example of a company warning about a poor second quarter. HON blames its problems on parts shortages and an inability to pass higher oil costs on to chemical customers. We wouldn't add to holdings right now.
Q: Any comments on Xerox [XRX]?
A: More of the same. Here's another company that will miss its second-quarter target. They blame the situation on a shift to lower-margin products. We want to see XRX get its sales force more efficient before we can get excited about this stock.
Q: How do you rank Microsoft now?
A: We recommend accumulating Microsoft for aggressive investors. The company sees personal computer growth of 12% to 15%, so Microsoft should continue to thrive. A breakup is still a long way from happening.
Q: How about some other highlights of the S&P 5-STAR ("buy") list, as we near closing time?
A: Why don't I give you a list of 10 to close out with? Those would include Applied Materials [AMAT], Bank of America [BA], BP Amoco [BPA], Cytec, IBP, Pfizer [PFE], Scholastic [SCHL], Sun Microsystems [SUNW], Vishay, and Williams.
EDITED BY JACK DIERDORFF
Copyright 2000 The McGraw-Hill Companies All rights reserved. Any use is subject to (1) terms and conditions of this service and (2) rules stated under ``Read This First'' in the ``About Business Week'' area.
6/25/00 10:19 PM |
