Some portfolio manager playing against Hickey:
“... While I respect Fred's valuation concern, I also respect the market’s action. Here are several "reasons" why I have chosen to overweight tech including owning a number of the stocks in his table (INTU, MXIM, INTC, XLNX, KLAC should own DELL but I don't have that much "guts"). First, as we all know, determining the "correct" valuation for a business is a shifting, elusive science. So I generally try to sell when a cycle feels too exuberant and the STREET analysts are excited about how "cheap" the stock's are based on next year's "obvious" estimates by extrapolating off a few years of strong sequential earnings. As a growth cyclical industry where capacity additions traditionally lag a recovery in earnings and cash flow, supply always seems to eventually exceed demand causing a diminution in prices/margins, a competitive struggle for mkt share and a collapse in margins BEFORE the street typically identifies such a trend. Hence the importance in charts... both identifying bottoms AND tops... although I have rarely caught either exactly. So when tech stocks in general (especially semi co's in the SOX index which tend to drive the NASDAQ despite so many other key sectors like software, equipment, etc) look real "expensive" based on modest projected earnings and especially high price to sales ratios (projected earnings don't mean much at peaks and troughs given the huge, often unpredictable earnings leverage inherent in a highly capital intensive yet rapidly growing unit volume business like semi manufacturing... similar conceptually to the airline business but with much faster inherent unit growth rates), I get interested. Then I watch the key leaders in each segment of tech to determine from their action when the group and which subgroups will emerge. Software lead tech down in '99 and it has lead this recovery so far, in my opinion. Look at MSFT and ORCL, two "VERY expensive stocks... They turned just before the market bottomed last summer. So my more bullish tech/market outlook starting in JULY largely reflected the action of the tech and the biotech sectors. The two corrections since this summer including the recent Dec lows have been classic, in my opinion. Many tech stocks retraced 50% of their moves off the summer lows and Fall peaks. So while I hear VERY slight rumblings and some modest evidence that the "worst" is over (ORCL qt, for instance, and INTC's and TXN's comments that business is OK combined with minimal earnings pre-announcements... and we're well into January now... if you're reporting a shortfall now, your accounting may be suspect!), I sense that the recovery is commencing and the stocks, as usual, are way out in front anticipating the next cycle. Yelling as Fred has that the group and or specific stocks are too expensive may cause him to miss the always huge initial recovery in the group that occurs even BEFORE "anyone" on the street identifies the improvement in fundamentals... Third, valuations need to be adjusted for the huge cash positions (especially @ MSFT, ORCL, MXIM, LLTC, XLNX etc) many of these leading co's have built during this 3 year downturn AND the historically low interest rate structure. With the accelerating growth in the money supply, this excess capital needs to go somewhere and equities always gets some of this excess until a recovery becomes increasingly evident... So while I respect Fred's concern about valuation, I believe his valuation/bearish/short at all costs posture is too late unless there in some unpredictable economic/geopolitical event that occurs like 9/11. In my opinion it's too late to be looking into a rear view mirror. The market has already shifted gears and is now groping around trying to anticipate the future. That's why the leading, typically large cap co's that investors have confidence in based on past performance are pulling the market ahead. Only when confidence starts returning will the lagging companies in each sector start to emerge (that's why the faster growing, less capital intensive, more predictable analog co's like MXIM, LLTC & then ADI and fabless co's like XLNX typically lead the turn in the semi group). The general pattern of recovery in equity prices is really quite similar in each market cycle. Anticipation precedes visibility... and higher risk, less predictable businesses require more "evidence" of improving fundamentals to attract investors. Hence the appearance of overvaluation among Fred's list of "expensive" technology companies... If you're more risk adverse but are willing to anticipate a turn, own his list. It's "safe" but inherently " |
