Investors are looking a little too hard for good news
" As for Dell, analyst
Richard Chu of SG Cowen stuck with his reduced estimates, and Brett
Miller of A.G. Edwards reduced his forecasts. "Dell continues to drive unit
volumes at a multiple to the market," he said. "Unfortunately, the market is
rapidly slowing, with a rebound looking further and further out."
POSTED AT 4:54 PM EDT Friday, October 05
By MATHEW INGRAM
Globe and Mail Update, Toronto, Ontario, Canada
Technology investors seemed determined to
surf a wave of optimism towards the end of
this week, following positive comments from John Chambers of Cisco
Systems and Michael Dell of Dell Computer. Despite the fact that the
market was heading into a holiday weekend, and despite bad news from
server maker Sun Microsystems — including the first ever layoffs in the
company's history — the Nasdaq index rose steadily to close near break
even, after being down by more than 3 per cent at one point in the morning.
Shouldn't that be a good thing? Doesn't it show that investors are returning
to the markets and seeing opportunity, and that they are prepared to look
past the economic slowdown to more prosperous times ahead? Perhaps.
But even some of those analysts and market-watchers who would like to
see a rally are suspicious when they see such moves — moves based on not
much more than a less-than-gloomy comment from a CEO such as Mr.
Chambers or Mr. Dell. That's hardly enough to get excited about, and in
fact such "sucker" rallies increase the risk of another market drop rather than
decreasing it.
How can you gauge a sucker rally? That's hard to define — but it has to be
at least a bit of a clue when a company like Sun Microsystems says that its
losses will be even larger than the already-large ones it announced in
August, announced plans to lay off 4,000 staff, and the stock goes up 2 per
cent. This is a company that said its revenues for the current quarter will
likely be almost 20 per cent lower than analysts were expecting, and whose
business is not expected to rebound until well into next year. Oh yes, and
the stock is now trading for 95 times current year earnings forecasts.
Another computer maker, discount retailer Gateway Computer, also
reported bad news on Thursday — and its stock also rose. The company,
which has been suffering for some time as a result of a PC price war started
by Dell Computer, said that its losses for the third quarter are likely to be
four times as large as analysts had been expecting. The shares went up
almost 4 per cent. The most ambitious comment CEO and founder Ted
Waitt could make was that he was "cautiously optimistic" the company might
be able to eke out a profit in the fourth quarter, if Christmas sales went well.
But didn't Cisco and Dell's comments make up for this kind of weakness?
It's hard to see how, since John Chambers merely said Wednesday that he
was "very comfortable" with analysts' estimates for the current quarter. He
didn't say that he had "good visibility" and that things were getting better,
even a little; he didn't even say that things had stopped getting any worse.
All he said was that Cisco would probably make its numbers for the current
quarter, and the stock went up by over 20 per cent — and pulled the
Nasdaq market along with it. The index closed up 6.5 per cent.
Dell Computer performed some similar magic on Thursday: The company
said that its sales rebounded faster than it was expecting after the events of
Sept. 11, and that it believed its business had "stabilized." It also reaffirmed
its guidance for the current quarter, saying it was winning market share due
to its price war, and combined with the wave of optimism from Cisco this
boosted the entire tech sector — probably because there had been rumours
that Dell might lower its earnings estimates for the quarter.
And yet, Dell refused to provide any guidance for the next quarter,
suggesting that visibility remains murky at best. The computer maker's
market share gains are also a company-specific phenomenon — they say
virtually nothing about the health of the tech sector as a whole, except that
they reinforce the impression that the PC business has become a commodity
industry. And yet, the entire Nasdaq moved higher on the news, and Dell's
stock climbed by almost 10 per cent. It is now trading at close to 40 times
this year's earnings estimates, estimates which may yet prove to be illusory.
Some analysts certainly weren't buying the happy conclusions that investors
drew from Cisco's and Dell's comments. Lehman Brothers cut its estimates
for the company and lowered its price target, saying the company was in an
enviable position but "near-term uncertainty exists." As for Dell, analyst
Richard Chu of SG Cowen stuck with his reduced estimates, and Brett
Miller of A.G. Edwards reduced his forecasts. "Dell continues to drive unit
volumes at a multiple to the market," he said. "Unfortunately, the market is
rapidly slowing, with a rebound looking further and further out."
Does that sound like the precursor to a healthy rally? Not really. Not unless
you're desperate for good news, which some investors apparently are.
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