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globeandmail.com
POSTED AT 12:03 AM EDT Friday, April 13
Some tech investors need to join a 12-step
program
By MATHEW INGRAM
Globe and Mail Update
Like an alcoholic after another all-night
bender, there were plenty of tech investors
who sat with their head in their hands a
month or so ago, looking at benchmark
Nasdaq stocks 80 to 90 per cent off their
highs. They swore that they would never,
ever do that again — never again would
they be so foolish as to binge on such questionable investments. So why do
so many tech investors seem to be falling off the wagon so quickly?
Maybe more direct action was required. Maybe, after the meltdown of the
Nasdaq was well under way, technology investors should have been forced
to sign something before they were allowed to buy more stocks — the kind
of document that Robert Downey Jr. has to sign when he gets released
every six months or so from some treatment program or other.
How about something like: "I agree never to buy something with no
earnings and a price-to-sales ratio of more than 10"; "I will never justify
such multiples by projecting where earnings and revenue might be three
years from now, when a company has only existed for two years"; "I
promise I won't believe a company when they stick to their forecasts, even
though everyone else in the sector has slashed theirs by over 50 per cent."
Investors could agree to stay away from discount brokerage Web sites for
at least two days after reading about a company's quarterly results, and to
agree never to look at analysts' ratings without a neutral third party being
present. Furthermore, they could promise not to think about what they paid
for some of those big losers, or to hope that they will ever get back there, or
to use the word "bottom" in reference to the Nasdaq — and to write an
essay about how not to fall for a "short-covering" rally.
Binge drinkers get suckered into returning to their old ways even though
they know that they will only cause pain and misery, and it looks as though
some tech investors have the same approach when it comes to stocks like
Yahoo, Amazon, Juniper Networks and Research In Motion. They have
been beaten up so badly by an unrelenting stream of bad news and earnings
warnings that having a company merely meet its already-reduced estimates
is reason for joy. A lack of bad news is greeted as though it was good
news.
Juniper and Research In Motion, two stocks that continue to trade at
eye-popping multiples despite the economic downturn and signs of a slump
in their respective markets, soared higher and pulled the rest of the Nasdaq
with them Thursday. Juniper released results that met analysts'
expectations, but it also cut its forecasts for the year — and the stock
climbed more than 17 per cent, even though it is already 100 times trailing
earnings and more than 50 times estimates for the current year.
Research In Motion actually outperformed estimates for both earnings and
revenue, although its earnings came largely from investment gains (that is,
selling shares in other companies). Revenue soared thanks to sales of its
handhelds to customers such as America Online, but most of the analysts
who upgraded the stock failed to mention that the growth in RIM's
subscriber base — which makes up the bulk of its recurring revenue — fell
about 20 per cent below targets. The stock climbed more than 28 per cent
and is now trading for more than 50 times even the recently upgraded
earnings forecasts for 2001.
The list goes on: Dell and Yahoo pushed the market up by more than 5 per
cent last week when they said that things are going to be almost exactly as
bad as expected. Dell climbed more than 14 per cent last Thursday, even
though all the company said was that it was sticking by its forecasts. The
stock is now trading at more than 35 times earnings estimates, despite the
fact that its profit margins are still falling. Yahoo climbed almost 25 per cent
after it was upgraded to a "buy" by a Lehman Brothers analyst, even
though questions remain about its business and it needs a CEO.
Motorola pulled an even better trick this week: it reported a quarterly loss
for the first time in 15 years, said its cellphone handset business is in serious
trouble and it will have to lay off thousands of employees — and the stock
has climbed to the point where it is now 16 per cent higher than it was just
before the company released its results. Revenue in a couple of its major
markets fell by over 25 per cent over last year, and yet the stock is now
trading at 92 times projected earnings.
Just because some analysts argue that the Nasdaq is getting close to a
bottom, and some economists think the U.S. will see a pickup in activity
toward the end of the year doesn't mean it's time to start partying again. |
