Good morning Lee, another storm today.
Regards,
Tom
Sunny skies await those who can endure stormy weather
SAN FRANCISCO (CBS.MW) - Over the weekend, I went running in the rain. Conditions
weren't optimal.
But the gray clouds will roll away eventually and the sun will peek out again. They always do. And a
run in the sun is a breeze when we've endured rain.
In the same way, a deluge of dismal economic data has been coming down
hard.
Yet while some stayed indoors waiting for sunnier skies over the past seven weeks, some took
chances: the Nasdaq is up 33 percent from a bottom of 1,387 on Sept. 21. Even investors who shy
from any sprinkle of bad news are looking for value.
Take Jonathan Cohen, a hedge fund manager of JHC Management, based in Greenwich, Conn.
Cohen has 10 stocks he'd sell for every one he'd buy. He also doesn't like to run.
But he points out that Cybersource (CYBS) , which provides online fraud protection for online
commerce, appears undervalued. The Mountain View, Calif.-company has a market cap of $48.6
million, equivalent to 79 percent of its cash. Of course, it's burning that cash as I write this. It's
expected to burn through $5 million this quarter on estimated sales of $7.6 million.
This is not a slam-dunk idea by any means, but its product does solve a pressing need and therefore
is worth keeping an eye on. According to a Gartner's Avivah Litan, who has yet to publish her
report, just over 1 percent of annual online sales, or $700 million, is lost due to fraud. With retail
margins so thin already, any step to prevent fraud may be money well spent, she said.
Like many fund managers who are craving returns, Ian Link, who manages the $120 million Franklin
Technology Fund, has been putting his cash to work in companies such as Taiwan Semiconductor
(TSM) . It's not exactly your typical Internet stock, but it is a leading indicator of demand for
personal computers and cell phones on which the Internet is accessed. Link's fund is up 36.8
percent since Oct. 1.
More rain
To be sure, every turn of events, such as Monday's plane crash, has a way of sapping the little
confidence investors have, even for Link. "I've to wait to see how it turns out. It's not very wise to
be plowing in right now."
The forecast looks pretty ominous right now. And here's why we need to keep in mind the
downside risk before we get ahead of ourselves.
"This is a head-fake rally," said Dan Niles, an analyst at Lehman Bros., referring to the buoyant
run-up since Oct. 1.
Niles would caution investors to remember the mid-1980s and early 1990s. Even though the decline
in quarterly sales may have hit bottom on an annual basis in September, the big question for him is
the slope of the recovery. Quarterly sales could be sequentially lower in the December and March
quarters. That means the earnings required to justify current valuations won't be generated for some
time, said Niles.
Among the data points Niles highlights:
-- In February 1986, semiconductor sales began to recover yet semi stocks collapsed.
-- In June 1990, semiconductor sales began to recover after falling from Nov. 1989. Yet as sales
recovered, stocks actually deteriorated. In fact, it took 19 months - May 1990 through Dec. 1991 -
before they topped May 1990 prices.
What does this mean? If history is any guide, current prices we see today may be the same prices
we see 19 months from now or by mid-2003. This pattern doesn't exactly make me want to rush
into stocks right now.
If investors think demand will be stimulated because of the stimulus package and rate cuts, consider
this: even if the Fed is cutting rates and we're all refinancing, including Niles, the extra cash may just
go into savings in light of the current environment.
"Think you're getting a bonus? Will I have a job next year?" he asked. Let's not forget that
investment-banking firms continue to downsize. Salomon Smith Barney is expected to make its
stinging lay-off announcement as early as Tuesday.
Niles pointed out that a one percent increase in the U.S. savings rate causes about a 75-basis point
drop in GDP. And if history is any guide, the savings rate might climb another 6 percentage points
before reaching the peak savings rate reached in the early 1990s - the last time the U.S. was in a
recession. According to Thomas Weisel Partners, savings hit 10.2 percent in late 1992. The savings
rate was 1 percent in 2000. In September it shot up to 4.7 percent. If consumers are saving, they
won't exactly be buying cell phones and personal computers or other electronics.
And remember the $38 billion in tax rebates that was supposed to spur back-to-school spending?
Niles pointed out that it failed to ignite any demand even before the Sept. 11 attacks. The Nasdaq
Composite stood at 1,695 on Sept. 10, down from 2,200 in July. The drop is largely due to eroding
expectations that consumers would begin buying for the back-to-school season.
Once again, the market is "discounting too quick of a recovery," said Niles. "It's the same reaction
to when the Fed dropped rates earlier this year and in the spring when the talk was about rate cuts
and tax rebates." The gains never held.
Indeed, the Nasdaq jumped from 2,251 up to 2,892, up 28 percent in January. It then unraveled to
1,619 in April, down 44 percent. Then it went from 1,619 to 2,328 by May, up 44 percent. But it
would only be a matter of months before those gains quickly shriveled back down to 1,695 on
Sept. 10, down 27 percent.
Now, stocks have recovered again, up 33 percent. Will they go back down? According to Niles,
stocks could unravel to their lows hit in Sept. Ouch!
What price for the optimist?
Of course, with interest rates down substantially, even Niles admits there are certain stocks to
consider. After all, it's hard to make a killing in treasuries or money market funds. "The good news
and bad news about technology stocks is that they're volatile," he said. "If you're nimble, you can
make a lot of money."
Nimble means having some targets to consider: when to get in and when to get out. For those entry
and exit points I sought the advice of Franklin's Link.
For Taiwan Semiconductor, Link would buy only until $15 and sell at $20. Taiwan Semi traded at
$14.50 on Monday. Link would buy Q Logic (QLGC) below $42 and sell above $50. Q Logic
trades at $46. Cirrus Logic (CRUS) , which trades at $13.30, looks good below $13, Link
advised. He'd still buy Peoplesoft (PSFT) up to $35 and sell at $50. He'd buy Siebel Systems
(SEBL) below $15. Shares of Siebel currently trade at $23.91. Agilent (A) , at $24.65, still looks
attractive below $26, although that's little upside. Agere , a wireless local area networking company,
trades at $5.67. Link would wait until it falls below $5 before considering. McData (MCDT) is
expensive at the current level of $18.52, but Link would consider it below $15 and sell it at $21.
Link and his research team would not consider Yahoo (YHOO) until it falls back below $8. Yahoo
traded at $13.70 in recent trading, ahead of the company's analyst day gathering on Nov. 15. |
