FWIW, Article, 8/7/01 "You May Think I'm Crazy..."
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You May Think I'm Crazy...
By James B. Stewart
MONDAY'S FALLOFF in the Nasdaq notwithstanding, investors have been creeping back into technology stocks lately. Semiconductors have been especially strong, surging 12% in the past month. Even so, there's a group of stocks that remain anathemas to most investors, and you can still barely give them away: telecommunications.
As I reported last week, I am one of the contrarians who's still buying these once-loved, now-hated names. I've already delivered my mea culpa in this sector, acknowledging that I began buying some of these stocks too soon given their continued demoralizing retreat. At least I avoided them at their giddy heights, and at recent prices, my average purchase price is sinking fast. My paper losses, of course, have risen just as fast.
Over the years, I've learned some of my most important investing lessons from similar circumstances, though I have to admit that nothing in my experience approaches the breathtaking reversal of fortune suffered by companies as diverse as AT&T (NYSE:T - news), WorldCom (NASDAQ:WCOM - news), Lucent Technologies (NYSE:LU - news), Nortel Networks (NYSE:NT - news), JDS Uniphase (NASDAQ:JDSU - news), Corning (NYSE:GLW - news) and other such once-esteemed names. These weren't, after all, untested start-ups with scant revenues and no profits, but seemingly solid companies with terrific growth prospects.
We've all now heard a great deal about why these companies stumbled and why their shares plunged: exorbitant overbuilding fueled by too much venture capital; overcapacity; resulting price wars; bankruptcies of customers. But now that's history. For those of us who failed to fully anticipate the extent of the looming catastrophe (which, if we're honest, is most of us), it's too late. The damage has been done.
At moments like these it's important to ignore the recent market reaction and ponder the fundamental reasons that led investors to these stocks in the first place. Those reasons included the remarkable promise of better service through the deployment of fiber-optic cables; an explosion of demand due to surging use of the Internet and broadband services; and an accompanying accumulation of data transmission. Now, let's ask ourselves: Are those reasons still sound?
Let me acknowledge at the outset that so far, none of this has come to pass. Fiber-optic cables have been deployed, but Internet usage isn't rising as fast as projected; data storage and transmission are stagnant; and the promise of broadband hasn't been realized. But does this mean that those premises are wrong and that they'll never happen? Put another way, why was it that it had to happen so fast — by January 2001, if the slumping stock prices are the indicator?
My own sense is that the basic reasons for investing in these stocks remain sound, even though the slow pace of technological change has frustrated most investors. Take Internet usage. Is it any wonder that anyone stuck with a 56k cable modem (which means most of us) isn't using the Internet more, and might even be using it less? As I've noted in this column, with my high-speed connection at the office, radio reception through RealPlayer software is terrific; at home, where I still have the old modem, it's nonexistent. That's just one small illustration. But audio and video feeds require enormous amounts of data transmission.
Consumers want high-speed connections, but telecom carriers have so curtailed their capital spending in order to boost short-term results that most of us are having to wait. That, in turn, depresses Internet usage. It's a vicious cycle, but I remain confident that it will eventually be worked out and we'll all have fiber-optic links into our homes. That'll require a huge investment in telecom technology. The promise of telecom growth remains; it will simply be much slower to be realized.
Investors, of course, can wait for some concrete signs this is happening. But investing is always a bet on the future, and if you wait until the uncertainty, and thus the risk, is gone, your returns will be modest. If, like me, you are a long-term, patient investor, you can afford to take the risk of being early. So two weeks ago, when I was in the market doing some buying, I increased my bet on telecommunications, picking up more Nortel and Ciena (NASDAQ:CIEN - news), and adding some Global Crossing (NYSE:GX - news) — which was promptly slammed after its latest earnings report and is now even more of a bargain. I would also have bought Corning, JDS, WorldCom and Qwest Communications (NYSE:Q - news), but I already own them in sufficient quantity.
All of these stocks are selling at prices that are 70% to 90% off their highs, and I had to spend very little money to increase my stakes. I was even tempted by the recent offering of Lucent convertible preferred stock for my tax-free retirement account, given the high interest rate and low conversion price. I decided I still can't go near Lucent, but for those of you with an even stronger appetite for risk than me, I'd look into it.
Telecom remains the single most undervalued sector in the market, in my view, and such widespread buying opportunities don't come around that often. Still, I could be wrong, and I'm mindful of the need for diversification. I'm now pretty comfortable with the level of my exposure, so any further buying on my part will probably be modest.
One thing I'm not buying right now, despite their recent outperformance, is semiconductors. Readers will recall that I did that months ago, when it seemed that everyone on Wall Street hated them. Now I'm enjoying gains of near 30% and 40%, respectively, on stocks of Applied Materials (NASDAQ:AMAT - news) and Novellus Systems (NASDAQ:NVLS - news). That's what I mean when I say you can't wait for certainty. |
