Investing--Redherring: "Fish or Cut Bait: Shop till you drop"
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>>>Fish or Cut Bait: Shop till you drop
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Want a good stock tip? Try Kimberly-Clark (NYSE: KMB), the maker of Kleenex. Sales must be going through the roof as numerous technology investors reach for tissues to wipe the tears from their eyes after looking at their portfolios. What a depressing week!
Earnings warnings from Motorola (NYSE: MOT) and Lucent Technologies (NYSE: LU) and uninspiring results from Yahoo (Nasdaq: YHOO) and Advanced Micro Devices (NYSE: AMD) have left investors bruised and battered. The Nasdaq hit a new low for the year on Thursday, and many appear ready to throw in the towel on tech.
But you know what? I think this is a great time to go on a big-time tech-stock shopping spree -- a "let's go to the Price Club and load up the minivan" type of binge.
PURSE YOUR LIPS AND WHISTLE
You might think I'm being blindly optimistic. With all the profit warnings, trouble brewing in the Middle East, and oil prices rising, there's a lot to be worried about.
Nonetheless, I think the selling has been overdone, and as a result there are many tech stocks out there that look to be wonderful bargains for the long-term-oriented investor. Simply put, it will take more than earnings warnings to make me shift from taurine to ursine mode. Why? The economy does not appear to be slowing enough to suggest that long-term earnings growth for top tech companies will be jeopardized. It seems that many companies are being sold based more on sheer panic than because of fundamental problems.
What tech stocks should you be buying? I would not suggest merely plunking down money on the most beaten-up of tech stocks in the hope that it can't get worse. Many stocks have fallen for good reason. Lucent, for example, is likely to be dead money for some time, and deservedly so. Another earnings warning? Let's face it: Lucent is getting its ass kicked by Nortel Networks (NYSE: NT) in the optical market. Period. So we don't want Lucent. We want companies that have strong earnings momentum.
MAKING A SHOPPING LIST
How do we find them? I'm a big fan of stock screening, using a computer to pinpoint stocks with certain characteristics that could make them potential winners. I used the screening tool from financial data provider Baseline, but for those of you without screening software, there are many free online stock screeners that you can use on sites such as Quicken.com, Hoover's Online, and CNBC.com.
Before I tell you what stocks came up, let me explain how I selected them, because that's really what is most important. If anything, the past few months should serve as a reminder that there is value in good old-fashioned stock picking. With all the bad news surrounding tech stocks, investors need to focus on companies with solid fundamentals. They are out there.
First, I excluded small-cap stocks, companies with a market capitalization below $1 billion. Call me chicken (ba-gawk!), but I wanted the comfort of well-known names with a decent amount of analyst coverage. Next, because of all the earnings warnings, I demanded that the consensus earnings estimates for this year and next year not have gone down during the past three months. I then set up the screen to find companies that are expected to post at least 25 percent earnings growth this year, next year, and for the next three to five years. In addition, I asked Baseline to find companies that had revenue growth of at least 25 percent over the past 12 months.
For valuation purposes, I set up the screen to find companies trading at a PEG ratio (a price-to-earnings ratio based on 2001 estimates divided by analysts' expected long-term growth rate) of less than 3. The average PEG for the S & P 500 is 2.2 according to Baseline, based on an average price-to-earnings ratio on 2001 estimates of 22 and an expected long-term growth rate of 10 percent. Now, since the companies I was looking for are expected to grow at a much higher rate than the general market, I feel comfortable paying somewhat of a premium for this growth. A high P/E ratio doesn't necessarily scare me if the company has growth rates to back up the lofty multiple.
Finally, I looked for companies with relatively LOW debt levels; if anything, I think the Federal Reserve is still more likely to raise interest rates over the next few months than lower them. With that in mind, it's crucial to find companies that won't get bit by high interest payments associated with their debt load, so I made sure companies' ratio of long-term debt to total capital was less than 26 percent, which is the average debt-to-capital ratio for the S & P 500.
A BAKER'S DOZEN
Fifty-two stocks came up on the screen overall. If anyone is interested in receiving the complete screen results, please email me and I'd be more than happy to send it out. But here are some of the stocks that I found intriguing. Cisco Systems (Nasdaq: CSCO), JDS Uniphase (Nasdaq: JDSU), and Nortel all made it through. No surprise here. Despite some of the short-term volatility with these stocks, I think these three are still solid, must-have stocks for any long-term tech investor.
Interestingly enough, despite the gloom pervading through the semiconductor sector as of late, a couple of specialty chip and chip equipment companies made it past my filter, such as equipment makers Applied Materials (Nasdaq: AMAT) and KLA-Tencor (Nasdaq: KLAC) (which reported fantastic results on Thursday) and chip companies Analog Devices (NYSE: ADI), Linear Technology (Nasdaq: LLTC), PMC-Sierra (Nasdaq: PMCS), and RF Micro Devices (Nasdaq: RFMD).
Other stocks that look interesting are Amdocs (NYSE: DOX), a provider of billing services for telecommunications companies; Indian IT consulting firm Infosys Technologies (Nasdaq: INFY); Internet routing firm Foundry Networks (Nasdaq: FDRY); and optical components maker Newport (Nasdaq: NEWP). Infosys and Newport look particularly compelling, as analysts have increased the 2001 earnings estimates for both companies by 24 percent in the past three months.
It's true that the environment for tech stocks might not improve too much over the next few weeks as investors continue to fret about the latest earnings warning of the day. But don't forget the basic tenets of long-term investing. The 13 stocks I highlighted are expected to post an average annual earnings increase of 35 percent over the next three to five years, which is solid growth no matter how you look at it.
FOCB INDEX WINNERS AND LOSERS
It's getting hard to stomach. The Fish or Cut Bait Reader Index endured the worst week yet in its short history, plunging 12.6 percent in the past five days. The Index is now 29 percent off its all-time high (zoinks!) and is down 15.45 percent since July 31. If it's any consolation (and it probably won't be) the Nasdaq has fared worse, falling 18.4 percent since July 31.
This week was so bad (How bad was it?) that only three of the 50 FOCB Index stocks finished with a gain. Three! E-business software maker Vignette (Nasdaq: VIGN) had a big week, surging 29.5 percent on no news. Vignette competitor Broadvision (Nasdaq: BVSN) was the runner-up with a 13.7 percent gain. These two stocks have curiously yo-yoed for the last few weeks on very little news. Broadvision reports third-quarter earnings on October 18 and Vignette is scheduled to release its third-quarter results on October 25. As for the losers, serial earnings warner Lucent had the biggest price drop, falling 34.5 percent after its latest bombshell. And there could be a whole lot of shakin' going on during the week of October 16, as 18 companies are on tap to report earnings. Whew!<<< |
