How come he didn't say this when he was a analyst?
An Antidote for Too Much Tech
By Thomas Kurlak
Special to TheStreet.com
01/30/2002 07:21 AM EST
A lot changed for me on Sept. 11. It has been more than four months since that awful day when my family suffered a terrible loss. And since then, family matters have taken precedence over writing about investments.
However, while my interest in the stock market remains high, my taste in stocks has been changing, and it was even before Sept. 11.
Rather than representing the beginning of a new cycle, the tech-led Nasdaq rally from last September's low looked too much like a continuation of the old one, with bubble tech stocks bubbling back up again. The recent stalling-out of this tech rally was inevitable, given the fundamentals and lukewarm "guidance."
The potential for real analytical enjoyment coming from detecting early signs of recovery in cheap tech stocks has been taken away (or at least delayed). Tech stocks just look so unattractive today. The fundamentals remain awful, and valuations are way too high.
A New Approach to Analysis
I've been out of Wall Street as a professional for more than a year now, and this absence seems to have had an impact on my analytical approach. No longer required to defend my latest recommendation, I am, for the first time in 30 years, totally free to invest my own money without restrictions. What I find myself doing is strongly tending toward value, quality and predictability. Maybe I'm just getting older, or maybe it's my years as an analyst with roots in an old-line trust bank (before my sell-side years), but the more I work at personal investments, the more I want to invest away from the most popular sectors, particularly technology, at today's valuations.
I'm thankful that my career as a tech-stock analyst for Merrill Lynch was accomplished over a period when, for the most part, valuations were more reasonable and often very cheap. At the cycle lows, which would last a long time, tech stocks could be bought for 0.7 to 2 times revenue and book value. That certainly wasn't the case even at the September low. Right now, Intel (INTC:Nasdaq - news - commentary - research - analysis) is valued at 8.5 times revenue, and Broadcom (BRCM:Nasdaq - news - commentary - research - analysis) is at 12 times.
But what is most disturbing now is the horrendous collapse of revenue. We are not just seeing 15%, 20% or even 25% declines, but complete wipeouts of 40%, 50%, 60% and even 80% down from year-ago levels. This is unprecedented in the past 30 years. For example, in recent fourth-quarter earnings releases, Texas Instruments (TXN:NYSE - news - commentary - research - analysis) reported a 41% revenue decline, Tellabs (TLAB:Nasdaq - news - commentary - research - analysis) had a 59% drop, Vitesse (VTSS:Nasdaq - news - commentary - research - analysis) chalked up a 76% plunge and PMC-Sierra (PMCS:Nasdaq - news - commentary - research - analysis) showed an embarrassing 80% implosion. Intel and Broadcom had 20% and 33% declines, respectively.
One thing I've learned over years of tech research is that when products peak and growth stops, pricing collapses. This literally erases the value of markets for suppliers. Remember calculators, digital watches and VCRs? Component vendors don't even mention them anymore. Now think PCs, cell phones and PDAs.
Poor Texas Instruments; its gross margins on digital signal processors for cell phones are no better than they were on DRAMs, and annualized fourth-quarter revenue is about 30% below where it was five years ago. And if Intel had more than one competitor, its gross margins would probably look quite similar to Texas Instruments'. Although Intel's revenue has grown some since 1996, the cumulative increase has been a total of only 6%.
Tech managements are witnessing the erasure of four or five years of growth. Of course, this means that a lot of that growth was false as bloated inventories in the supply-chain and end markets (such as telecom) became overbuilt. So what was tech's real growth rate? Not 50% or 60%, but probably more like 10% to 15%. Not bad -- but not worth 8 to 12 times revenue or more.
Alternatives to Tech
So where am I going with my "retirement" money to find positive returns in today's market? I've been having success in areas far from high tech, such as railroads and trucking, foods, restaurants, brewers, health care, regional banks and defense. In these sectors, I can still buy stocks with good, predictable fundamentals, some at 10 to 13 times earnings, 1 or 2 times growth and low multiples of revenue with dividend yields that exceed money markets.
My portfolio has benefited from owning:
Canadian National Railway (CNI:NYSE - news - commentary - research - analysis)
Roadway (ROAD:Nasdaq - news - commentary - research - analysis) (I once followed rails and trucking)
Bob Evans Farms (BOBE:Nasdaq - news - commentary - research - analysis)
Hershey Foods (HSY:NYSE - news - commentary - research - analysis)
Anheuser-Busch (BUD:NYSE - news - commentary - research - analysis)
Johnson & Johnson (JNJ:NYSE - news - commentary - research - analysis)
Union Planters (UPC:NYSE - news - commentary - research - analysis) and
Northrop Grumman (NOC:NYSE - news - commentary - research - analysis) (I also followed aerospace/defense at one time).
And recently I've been buying Ambac Financial (ABK:NYSE - news - commentary - research - analysis).
Frustrated tech investors who have had a too-full diet of high valuations and management "guidance" should take a look at some of these companies and check out the numbers. You'll be surprised by what you find |
