excerpts from Barrons:
So, are we near a bottom? We put the question to one prominent fund manager, who admitted to fears the market will see a further 20%-25% drop, which would bring the Dow down to the region of 7000-7500. "I don't think the Asian negative will derail our economic growth, but it won't go away, and it will get worse over time," frets our shy, bearish friend. "At the bottom, you typically get climactic activity, with high volume, and a put/call ratio above one. I don't see the put/call buildup, the panic, the cash."
Richard Hoey, the chief economist at Dreyfus, notes a divergence in how the high-profile market gurus assess the outlook for stock prices. "What fascinates me is the debate between the technicians and fundamentalists," Hoey says. "A majority of the fundamental strategists look at cheaper stock prices and reiterate their positive stance -- Abby Cohen, Edward Kerschner at PaineWebber, Thomas Galvin at DLJ, Jeffrey Applegate of Lehman Brothers. They all make the case that fundamentals remain the same, or at least not that different, and that the risk-reward ratio improves as prices come down."
The Dow fell another 173 points last week, to 8425, and now stands 9.8% below its July peak. The index would be even lower had it not been for a rumor-driven 9 and one-eighth point surge by JP Morgan on Friday.
On the other hand, Hoey points out, many prominent technicians, including Ned Davis, Justin Mamis, Ralph Acampora, Salomon Smith Barney's Alan Shaw, and Bob Farrell and Dick McCabe of Merrill Lynch, have become increasingly concerned over the course of recent weeks. "They see a narrowing of the market, the broad market weakening even as the senior averages made new highs," he says. "The question for them is, have we already completed the process? Is it a forecastable trend for the future, or simply a recognition of what has already taken place?"
So, who has it right? In a way, both, Hoey argues. The technicians, he notes, have given a fair description of what's been occurring. The fundamentalists don't say the market should not have come down, but that returns will be reasonable for the next year, now that stocks have been adjusted downward. Adds Hoey, "I tend to fall with the optimists on inflation and interest rates. My primary concern is that the bulls don't have it right on corporate profits, Asia, and the slowing of the U.S. and world economies."
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If you were expecting Applied Materials, which reported earnings last week, to provide a hint of when the semiconductor equipment sector might start to recover, you were no doubt disappointed. Applied said new orders in its fiscal third quarter, ended July 26, fell to $608 million, from $1.03 billion in the second quarter, and $1.24 billion a year earlier. In a statement, James Morgan, the company's CEO, said he couldn't predict how long the current downtrend will last, and that Applied was "assessing the appropriate level of infrastructure necessary to support a lower business volume."
Carl Johnson, editor of Infrastructure, a newsletter that tracks semiconductor equipment stocks, noted in a recent issue that Applied's fourth quarter will likely be about breakeven, followed by two or three more "dismal" quarters. Johnson also thinks Applied will soon make deep job cuts, trimming as many as 3,000 of its current 14,000 employees. In short, it looks a little early to bottom-fish the semiconductor equipment stocks. Applied Materials last week fell 4, to 31 1/8 .
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Analysts cite several reasons for this distressing behavior. For one, Checkpoint competes head-to-head in the firewall market with Cisco Systems, which has been by far the most dominant player in the market. Some observers fret about competition from Microsoft, which includes some security features in Windows NT, its network operating system. There are also concerns that Checkpoint's growth rate is slowing, and that margins are shrinking. And all those issues contain a grain of truth, but none have stopped the company from reporting quarter after quarter of stellar growth. The bottom line is this: Checkpoint is an Internet stock that everyone seems to be missing.
Gibbs Moody of Warburg Dillon Read says Checkpoint is "the single most frustrating name" he's followed in 14 years as an analyst. The Cisco-related worries, he notes, cropped up after that company bought a small firewall company. "But to date, they have not introduced a Checkpoint killer product," he says. "Cisco has stayed loyal to its core business, and server-based firewalls aren't its target."
And Microsoft? "They've never had a competitive enterprise-software offering in the history of the company," he says. "The first one will be Windows NT 5.0."
Checkpoint has significant exposure to Asia, and Moody concedes that business in the region in the June quarter was below plan. Despite that, the company matched the Street's earnings revenue estimates, and beat EPS projections. "My contention," Moody says, "is that the market growth for firewalls is 45%-50% next year, and Checkpoint will grow at least in line with that growth rate."
A recent International Data Corp. survey showed the company gaining market share against both Cisco and Network Associates. Moody puts earnings next year at $2.15 a share, with upside potential.
Nor does Gil Shwed, who shares the CEO and president titles at Checkpoint with Deborah Triant, have an explanation for the stock's recent slump. "I don't have a good answer," he said in an interview last week. "We're just trying to build shareholder value by bringing in the business results, which we did in the last quarter, and for the last three years."
Shwed wasn't about to bless any earnings estimates, but he did express optimism about the outlook. "We're bullish about the business we're serving," he says. "Our people in the field are seeing more large deals. Customers want to do business with Checkpoint. The company is delivering excellent results."
The stock, of course, has not been. But that could change.
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Down, But Not Out
A host of stocks that may have been overpunished are ripe for the picking
By Leslie P. Norton
interactive.wsj.com
Excerpts:
Several oil-service issues pop up on our list, and no wonder: Gasoline is cheaper now than bottled water. Yet investors remain wary as OPEC members overproduce, inventories pile up and weather remains uncertain. Tom Samuelson, who steers Denver Energy Advisers, a hedge fund, is doing most of his buying among high-yield and convertible bonds, not stocks. With drillers, he says, "I agree there's an interest here for true bottom-fishers, but it may get worse before it gets better. I'd personally wait to see signs of further improvement." McDermott International, he notes, is suffering from a slowdown in energy industry capital spending. And don't be fooled by rising earnings estimates, says Samuelson. "Current earnings are a lagging indicator because these companies live off their backlog. If new orders dry up, you put a lower multiple on that backlog." Thus Dresser Industries, which is merging with Halliburton, is down sharply.
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Yet these stocks can turn quickly. Shares of Rambus, which came public last year, vaulted last week after Samsung Electronics said it will mass produce Rambus' 64-megabit memory chip from 100,000 units a month to one million units by mid-1999. Many believe Rambus will be the standard PC memory chip.
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Been Down So Long It Looks Like Up?
Fifty of the 173 biggest losers found in a Barron's screen (continued)
Part 1 of Barron's 173 biggest losers
Company Symbol Mkt Cap
(billions) Price
8/10/98 % Down % Chg
B F GOODRICH GR $2.638 $36.19 -35.40 0.40
COMPUTER HORIZONS CHRZ 1.005 34.75 -35.00 14.20
SAFETY-KLEEN SK 1.360 3.88 -34.70 6.50
AEROQUIP-VICKERS ANV 1.336 47.38 -34.40 5.90
AMRESCO AMMB 1.118 26.13 -34.30 0.60
BARRICK GOLD ABX 6.224 16.56 -34.20 0.00
INTERNATIONAL HOME FOODS IHF 1.783 23.06 -34.10 2.40
MILLENNIUM CHEMICALS MCH 1.910 24.63 -33.70 1.50
PEOPLESOFT PSFT 8.641 38.13 -33.60 6.90
DEERE DE 1.0436 42.63 -33.50 1.00
BLYTH INDUSTRIES BTH 1.296 26.38 -33.20 1.20
HOST MARRIOTT HMT 3.244 15.88 -33.20 17.90
LYONDELL PETROCHEMICAL LYO 2.001 25.50 -33.10 0.40
ADC TELECOMMUNICATIONS ADCT 3.939 29.31 -32.80 0.20
CMAC INVESTMENT CMT 1.068 47.19 -32.60 0.70
CATELLUS DEVELOPMENT CDX 1.593 14.94 -32.10 146.00
PRECISION CASTPARTS PCP 1.119 46.00 -32.00 0.50
SUNDSTRAND SNS 2.750 48.69 -32.00 6.50
REXALL SUNDOWN RXSD 1.927 26.63 -31.70 10.50
AUTODESK ADSK 1.645 35.00 -31.50 1.00
PANAMERICAN BEVERAGES A PB 2.895 28.75 -31.40 0.60
PIXAR PIXR 1.983 45.25 -31.40 N.A.
SOVEREIGN BANCORP SVRN 2.090 15.63 -31.30 0.80
FLUOR FLR 3.262 41.94 -31.30 5.20
PMC-SIERRA PMCS 1.066 35.38 -31.00 7.20
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