Doug: When I made that call I operated on certain assumptions about the fundamentals, the probability that a few more brokerage houses would upgrade in response to the same fundamentals that I saw, and that the market would exaggerate the upward momentum for a few days - that is why I called for a "spike", at least intraday, from 33-35.
When I "foresaw" a pullback from a high of 35 to 28 on a temporary basis (I made this call for this current period before the last earnings announcement) I did not expect the pullback to come as soon after the recommendations and the spike up as it has, and I did not expect it to last more than, say, a working week, give or take a few days.
I have already said way back that I thought it would return to the 31-33 trading range (and I now say that should be 30-33) and it would up to 37 just before earnings announcement. I said it would move to 41 sometime soon after earnings and pull back to a 38-40 range. I think it will surpass 55 and even 59 within a 4-6 month period.
However hard I try I cannot find any hard information that would cause me to change my view of the fundamentals. If anything I would be more inclined to beleive that BAY will surprise on the upside. I think the European economy is much stronger and BAY saw a lot of growth in Europe last quarter. This would further offset any lingering weakness in the rate of BAY's US growth or in SE Asia, but I would think that the US rate would be better this quarter given the new products, which seem to be focussed on US customers.
Obviously there have been suggestions lately that the fundmanetals have changed and that BAY may announce problems with product ramp up, capital investment delays among customers, profit margins from overly competitive pricing etc. But none of these suggestions have been substantiated. They appear to be from persons and institutions in the market who are not as familiar with BAY characteristics as they might be, focussing on seasonal factors which are always present this quarter. However, because the uncertainties have been highlighted, we all lose confidence. If BAY does pre-announce or miss profit warnings, I will be like the philoopher Bertrand Russell who was an atheist but who confronted with God after his death planned to say "why didn't you give me better evidence".
The hard part is guessing how the market will behave even if these fundamentals are still in place. BAY tends to be very volatile before earnings and in a two to three week period before earnings you can see quite a range. It seems to reach its pre-earnings peak a week before earnings and drops off. Lately we have seen a sharp drop off after earnings even though earnings are good. This time it may be better because, for the first time in a long time, BAY should be able to say in its conference call that the next quarter will definitely be stronger. The book to bill should be more impressive.
My underlying worry is that the general makret may pause or "consolidate" before earnings, especially as valuations remain high or more pre-warnings come through, and that the BAY psychology may not be strong enough to stay above 28. This is not a problem of fundamentals but a problem of short term market psychology.
One of the possible upside factors is that Intel and especially Compaq will have relatively better earnings than is suggested by their recent warnings.
These are all guesses.
Victor |
