Wall Street is looking a little nervous heading into earnings season.
By Louis Navellier from Navellier Management 01-14-2002
investavenue.com
Wall Street is looking a little nervous heading into earnings season. Lasts week, the Dow slid 2.6% and the Nasdaq fell 1.8%. The Dow is now in the red for 2002 (-0.33%) while the Nasdaq still sits firmly in the black (+3.7%). The Nasdaq has been hanging pretty tough, but that could easily change within the next couple of weeks. In order for technology stocks to hold their recent gains, tech companies will have to include some very optimistic guidance for future growth in their earnings announcements. Oh yeah, earnings might help too. Tech companies realize how important guidance is right now, and you can bet they will do everything possible to put a positive spin on bleak earnings results. The question is, will investors continue to absorb the rah-rah?
Cisco Systems could be in for a rough week next week following BusinessWeek's fresh cover story, "Cisco: Behind the Hype." This cover story has some alarming statements like the following: "Legions of true believers still cling to the hope that Cisco will reemerge as the high-tech bellwether that will lead the sector out of its slump. Their continuing faith is why Cisco stock trades at a spectacular 95 times estimated 2002 earnings despite losing money in 2001. A new study by Robertson Stephens estimates that even if Cisco grew at 20% annually over the next 10 years, to $100 billion in sales, and sustained operating margins of 15%, an investor who bought the entire company at its current market value would earn a measly 3% return a year, based on projected cash flow. They'd be lucky to do so well. The chances of hitting that 20% growth target now seem a stretch." Michael Porter, a Harvard Business School professor, said, "When the historians actually plow through all the data, we will likely find that even during its so-called heyday, Cisco wasn't nearly as profitable in terms of return on invested capital as many believed."
In past comments, we mentioned that there has been a tremendous amount of "faith buying" going on in tech stocks. Many investors have made a great deal of money in tech stocks over the past several years and remain loyal as a result. This loyalty could prove to be dangerous. The dangerous part is buying into the hype, which is rampant in the sector. This doesn't mean that every tech stock should be avoided. There are still some tech stocks we like. In fact, we added a few tech stocks to our portfolios recently. The reason we haven't bought more is that the valuations are extremely rich. Last week, Bloomberg reported that the Nasdaq currently trades 229 times forecasted earnings. That's enormous!
There will be some big-time tech announcements this week that will be highly watched. Intel (INTC), Microsoft (MSFT), IBM and Sun Microsystems (SUNW) will announce earnings (INTC-1/15/2002, MSFT-1/17, IBM-1/17 and SUNW-1/18). We don't think that these bellwethers will pull the tech sector further skyward, unless the sector's fundamentals firm substantially.
Mr. Greenspan's comments at the Greenlining 2002 Summit in San Francisco were mostly bearish short-term, with some long-term bullishness. He continued to stick to his "the U.S. faces significant risks in the near-term" comment. His concerns were that capital spending might not pick up as quickly as the market is anticipating since "the virtual absence of pricing power" continues to pressure profit margins, and that consumer spending may run into some problems resulting from rising unemployment and higher mortgage rates. His comments caused a big jump in the probability of another rate cut from the Fed (jumped from 28% to approx. 60% according to the Fed Funds Futures contract). |
