Good article:
I subscribe to Fred Hager and for the second time in a year, I got a good article from his
newsletter. I don't usually post paid newsletter material out of respect to the services, but
given the current market conditions I believe we should all help each other in this time. Fred
is a long term buy and hold guy who claims to have made a few million doing just that.
I've taken care to remove his picks from this article, since it's the jist that counts. It is
noteworthy that many of Fred's fiberoptic picks are GG's picks . Hope it helps put this
difficult time into perspective.
On The Current State Of Fiber Optics
By Scott Shaw
I heard the news today, oh boy. Unconfirmed rumors have it that Lucent's
debt may be downgraded, possibly to junk and Nortel announces the lay-off
of 5000 more employees. CNBC even ran a special called "Saving the
Economy." (Note: Kind of funny how the markets started a recovery the
next day; and further irony, the CNBC "NASDAQ 5000" special was aired a day or two
before the beginning of the current market crash.)
So what is going on? There is no doubt that the fiber-optic sector is
getting killed, and justifiably so it would seem. Business growth seems to
have stalled and the leading stocks in this industry have fallen farther
than the market as a whole. Some have fallen nearly as far as many of the
no-business model dot coms. Amongst the stocks taking some of the worse
clobbering are the Fred Hager recommended stocks of **** **** **** ****. Not
surprisingly there is much confusion, discontent, anger, frustration and you name it in
regards to the emotions of holders of these stocks. We have no doubt that most of the
people reading this column are amongst those holders, and are most likely experiencing the
same feelings in regard. The news for these stocks is not getting any better at the
moment. Estimates for this year's revenues and
earnings are slowly coming down, the stocks all look weak technically, and
there is no near-term catalyst in sight. So the question becomes: WHY THE
HECK AM I HOLDING THESE STOCKS FOR CRYING OUTLOUD! Or for those not
holding but looking to buy the question is, is now a good time to buy?
As many subscribers know, we don't practice technical analysis, and we
certainly don't try to call bottoms. I for one am not arrogant enough to
say it'll hit $10 and then bounce to the moon. It is not market technicals
that are holding these stocks down. Instead, it is economic conditions.
These economic conditions are likely to last at least until the middle of
the year, and perhaps longer. Some experts are predicting that these
sectors won't recover until sometime next year, if then, if ever.
This article is not for the purpose of challenging, or to debate these
"experts", but instead to put the current situation into perspective. I
know I've lost a lot of money in this sector (at least on paper) and I know
a lot of our readers have as well. But does that mean we should sell now,
take what is left and buy savings bonds? At Fredhager.com, we certainly
don't plan to. Stocks are the one commodity people seem to be happier (or
at least more eager) buying at higher prices and then happier (or at least
more eager) to sell at lower prices. And although we do not know how low
some of these names will go, we are confident, that over the ensuing two to
three years, these stocks will indeed go higher, some of them much higher.
What I would prefer to do here is put the fiber-optic crash into
perspective and explain why we still have confidence in the sector, and why
we think it is a mistake to sell out at these prices. That is, unless you
need a capital loss or unless you can find a more undervalued stock with
greater long-term potential. We believe it will be very difficult to do
so, no matter where the bottom hits on these stocks. The first example I
want to use is Ciena.
In 1998 the price of Ciena's stock fell 76%, bottoming out in October of
1998. Investors in Ciena were outraged, confused, depressed, and in a
state of total disarray. The stock was trading for as low as $5 and change
in October of 1998 and did not improve much throughout the rest of the
year. However, during the following 12 months a funny thing happened: the
stock slowly and subtly began to rise. The Street had originally thrown it
away, after all, what future did "optical" have? It was a fantasy, or at
least too far away to do anyone any good. And, besides, who will ever need
all that bandwidth? By the end of 1999 Ciena quietly rebounded and was
trading at nearly $30 per share. As of today, from the middle of November
1998 to today (even following this historic market crash) Ciena is up 529%
for an annual compounded return of approximately 94%. It was a case of
recognizing leading technologies, having confidence in your company since
the fundamental outlook for the company had not changed, and being happy to
buy at lower prices when market sentiment turned against it.
Sure, sure, you say, that was Ciena. There is no guarantee * or
* will do the same. To which I say, you are correct. There is no
guarantee. But let me cite another example: Intel in 1985.
Semiconductor stocks had crashed. I mean, they were taken out. The future
of the semiconductor industry looked bleak at best. The United States just
could not compete. As George Gilder referenced, even Intel, like Chrysler
before it, was asking for Federal government intervention to save the
United State's semiconductor industry. Funny thing happened from there
to now, however. Intel, even following the current historic market crash,
has seen its share price appreciate by 6624% from December of 1985 when the
industry looked as if it might go under until today when it looks as if PC
growth is at an end. Currently, like the semiconductor industry in 1985,
the fiber-optic industry looks equally as likely to go under or at least
remain in a general funk. Perhaps, following a moment of glory, the
optical industry will from here on in remain a stagnant industry, much like
the railroad industry is today. Nah, I don't believe that either.
To place what is happening in more perspective it is interesting to note
that it is not just technology companies that exhibit this boom or bust
volatility. Nike is a great example of this. During its hey day (when
Nike was really dominant through the Jordan years), Nike's stock fell 40%
or greater not once, not twice, not even three times, but believe it or not
7 times. Nike's stock recovered each and every time. Although somewhat
less volatile than Nike, technology stalwart Cisco, in 1994, experienced a
greater than 40% crash in its stock price. Nevertheless, even taking into
account the aftermath on Cisco's stock during the current market crash,
Cisco is still up 1300% (59% annual return) from the 1994 stock price
crash. Even if you had bought Cisco at the pre-1994 crash top, you would
still be up 743% as of today or a 43% annual return. (Incidentally, prior
to this year, the last time Cisco missed earnings and warned was in 1994.
Warnings and missing earnings are not necessarily the death knell for a
leading company or its industry.)
The point here is not that every stock that crashes recovers and moves on
to new, and much higher highs. The point is not that every stock we
showcase at Fredhager.com will necessarily succeed brilliantly and
experience a similar recovery. The point is, is that sometimes great
businesses suffer stock market crashes. Great businesses suffer through
poor economic conditions. But it is also true that great businesses
eventually recover and their stocks will rebound strongly when they do
recover. It is quite often a mistake to sell such companies at or near the
bottoms of such crashes.
It is a simple fact that the best growth stocks are extremely volatile and
subject to extreme market sentiments, ranging from exuberance to out-right
dread. The best companies bounce between the extremes, keep executing,
dust themselves off and get back on their feet stronger than ever. The Fred
Hager portfolio companies are chosen with this in mind. Our stock picks
are not made with the short-term in mind. They are long-term picks of
companies which we feel will be future dominant players in the most dynamic
and world changing industry in the world: disruptive technologies in the
communications sector.
To lay it out flat: THE OPTICAL BUILD OUT IS NOT DEAD. It may seem so at
present, but this is not the case. The optical build-out is still in its
infancy and will be a decade or two decade long process. The world's
entire communication system will be re-built and revolutionized, perhaps
more than once, within a time frame of 10-20 years. Compare this to the
build-out of the phone system. This took place over most of a century.
The build-out of the new optical networks will create an enormous amount of
wealth and it will do so in a compressed period of time taking no longer
than one to two decades. This build out of the new communication
infrastructure is expected to be 20x more valuable than the initial build
out of the enterprise networks that propelled Cisco to prominence, and at
one point to the position of the most valuable company in the world. It
will be those companies, the companies that have the leading and most
disruptive technologies that enable this new network, which will
disproportionally capture a large chunk of this wealth.
In contrast to this bright future, doom and gloom is upon us. Newsletters
predicting a decade long depression (not recession, but depression) are
making their way around the Web. Believe them if you want. It is always
easier to believe the conventional wisdom, to see the remains of a forest
fire without seeing the inevitable and stronger recovery of the forest from
the ashes. At Fredhager.com, we prefer to look forward and keep our
investment dollars in the companies shaping tomorrow. We are working hard
at following the best investment opportunities of the coming decade, where
the greatest amount of wealth will be created. It has been and still is
our current belief that companies such as **** will be among the most likely benefactors of
this network build-out. We are not letting a short-term shakeout amongst
telecommunication companies cloud the big picture. The big picture has not
changed. Neither have the long-term fundamentals of any of these companies
changed. What has changed is the short-term momentum, and we are not
blind, make no mistake about it. This is a market crash of historic
proportions. But it changes nothing other than make these stocks even more
attractive than they previously were for the long-term holder. |
