QCOM is the next to fall
Stephen Hu masterhu@yahoo.com
After many years in stock market, I believe diligent analysis and fewer transactions will help the overall performance. Day trading is almost a sure way to lose money because the transaction fees and bid/ask spread will add up to a significant amount to trader’s disadvantage. The strong convictions only come very few times a year, and that’s the time to execute. This time I think Qualcomm (QCOM) is going down and recommend a sell.
Warren Buffet once said that when the shoeshine guys were talking about buying stocks, that's the time he would sell. While, I saw a shoeshine guy used a cell phone two months ago. That made me to do some homework on wireless industry. I found some alarming data and come to a conclusion: Wireless industry is grossly overcapacity and in serious trouble.
Nextel has $15.6 billion in long-term debt and pay more than $1 billion a year in interest payments. Sprint PCS faces a monstrous $15.4 billion in long-term debt, $4.5 billion in short-term debt and $5.2 billion other liabilities, according to Securities and Exchange Commission filings. To make things worse, wireless subscriber growth is slowing down dramatically according to industry data, as evidenced by that shoeshine guy already has a cell phone.
If the dot com bubble was bad, the telecom bubble is even worse. Why? The dot com stock price goes up and down on paper, market cap come from nowhere (maybe the hype?) and evaporate. But their debt size is relatively small. Amazon has about $2 billion; Yahoo does not have debt at all. So there is not much suffering to the creditors. Telecom is a huge established industry and was able to borrow huge money when the expectation was unrealistically high. They have been operating on continuous borrowing to meet the cash flow requirements. Some estimate that the total debt is over $100 billion. With 5-6 national providers competing fiercely over market share by lowering prices, nobody is making money. In fact most are losing big money on wireless business quarter after quarter. Just think about over $100B was invested in this money losing business with no profit in sight; the chain effect could be devastating. Qwest was forced to fully tap a $4 billion backup credit line after it failed to find buyers for new short-term debt. Sprint said today that it has no plans to draw on bank credit, but I doubt they will have other choices. Most lenders are concerned with the problems wireless providers are facing. With lawsuits filed against major financial firms lending money to Enron, everyone is on high alert. That's why Sprint PCS dropped to $8.75 today from around $24 in early January; Nextel dropped to $3.55 from $11.67 with pretty much no bounce.
You may say the damage is already done and why am I saying this here? While, I don't think it is over. If you were one of our clients who followed our advice, as I did in my model portfolio shorted PCS at 15, I am still holding the PCS short and recommend clients to do the same. I will give out the recommendation when I plan to cover it. I expect more bad news coming about the debt issue. PCS will likely to go much lower until someone like to pick it up. But who would like to carry that debt load? Plus newer equipment to build networks is cheaper and more efficient. I do see bankruptcy reorganization is a serious possibility. One thing worth noting is PCS has over 150 millions shares sold short, which makes shorting it risky.
So what's the new idea? I am recommending sell QCOM. I put my money where my mouth is, shorting QCOM in my model account. The bounce backs will provide good entry points, preferably near $40. There are 23 brokerage firms covering QCOM at CBSMarketWatch.com: 10 strong buys, 11 buys and 2 holds. I am betting they are wrong. You heard it here on 2/19/2002.
The economy is a complicated ecosystem and all companies are living in the food chain (supply chain). Qualcomm makes money when wireless providers sell cell phone sets, or add/upgrade network equipment. When the cell phone subscriber growth slowdown, vendors will cut back on spending dramatically, they will feel the pain 1-2 quarters before their suppliers. Same thing happened in the dot com age, the dot com companies feel the pain first, and their suppliers like FFIV feel the pain later. FFIV made real earnings about $1.3/share while it was trading in mid 30s in late 2000. Many argued the business was solid thus no worry. While, FFIV traded under $4 couple months later. I think the same thing will happen to QCOM. With 70% drop of NXTL and 64% drop of PCS in 6 weeks, it is a little late to start short position, but QCOM did not drop that much yet, which provides opportunity to initiate a short position. Many people have high hope on 3G data networks. I think the ramp up will take much longer than most people anticipated. How many people would use a cell phone device to surf Internet while on train or driving?
Technical indicators also showed QCOM is trending lower. The Center for Financial Research and Analysis Inc. announced on Feb. 8 that they found accounting issues in QCOM's report. The stock broke the yearly low of $38.30 on that day. But it was later realized that the issues were fairly small, and many brokerage firms recommended a buy. The rally was short-lived and today it closed at $37.40. It is now safe to say QCOM truly broke the yearly low, which is a very negative sign.
The overall market, especially the large caps represented by DJIA and S&P500 index are coming into a very dangerous zone. If you look at the charts, you will find they bounced back after 9/11 technical bottom, but just couldn't break the pre-attack downtrend line. The indices formed a very smooth round peak and now trending lower. If there is no significant good news, which I don't expect, the market is poised to have an accelerated drop within the next couple weeks. If there is any catastrophic event, this could be the crash my model has been waiting for a long time. If it happens, this will be the buying opportunity once in 5-10 years. I recommend reducing long positions significantly, possibly selling all stocks to wait for the buying opportunity, or have 20-30% long and 30-50% short. Simply put, the risk is too high and the possible reward is too low for a heavily long portfolio at today’s market. I usually don’t sell short except when I feel the market will very likely to go down.
I am feeling much better than 2-3 years ago because the market is very rational now. When we were on top of the big bubble all the serious analysis simply didn't work. I am happy to see my model portfolio (a real brokerage account) went from $68K in last July to $145K as today's close. I am currently holding short positions on PCS, QCOM, EMLX, VRTS and small long position on EONC. For information on my investment services and comments, please write me at masterhu@yahoo.com
Thank you!
RECOMMENDATIONS AND ADVICE GIVEN HEREIN ARE MADE WITH THE EXPRESS UNDERSTANDING THAT READER ASSUMES ALL RISK OF LOSS. I GIVES NO GUARANTEE, EXPRESS OR IMPLIED. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. ALL INVESTMENTS CARRY RISK. |
