The buys have it...Q&A: Which Internet and Telecom Stocks Should
You Buy?
Analyst Mark Cavallone unveils Standard & Poor's picks in each sector
Telecommunications stocks continue to hold up well as the market
gyrates, especially compared with the less stable Internet stocks, says
Mark Cavallone, Standard & Poor's communications equipment and
Internet stock analyst.
Whichever you like for now, the long-term outlook for both sectors is
positive -- and interrelated, according to Cavallone. Internet stocks
should continue to benefit from the increasing number of people going
online, which is driven in part by falling PC prices. Telecommunications
equipment vendors are benefiting as service providers upgrade existing
communications networks because of fierce competition. And, as the
number of wireless subscribers increases so does demand for wireless
phones.
In a chat hosted by Business Week Online on America Online on June
22, Cavallone discussed these trends along with his favorite stock picks.
Here is an edited version of Cavallone's answers to questions from the
online audience and from Business Week Online moderator Jack
Dierdorff.
Q: The market seemed to have adjusted to the prospect of interest
rates going a notch higher next week, but today it was off again.
What's your diagnosis?
A: Today, I think we just saw a bout of profit taking. The Nasdaq is still
up over 5% since the beginning of last week. So, there has been a lot of
strength lately in the tech sector.
Q: How about the companies you cover? How have they been
doing?
A: The telecommunications stocks have held up very well over the past
month or so as the overall market has gyrated. There is a lot of demand
for communications related equipment, particularly on the wireless side.
The Internet stocks, on the other hand, were hit especially hard by the rise
in interest rates. However, the latest Consumer Price Index number (a
measure of inflation), which was below expectations, took a lot of
pressure off the sector and the Internet stocks have since rebounded.
Q: Where do you think AOL is headed?
A: Right now I rate America Online as a buy, or five-stars, which is our
top ranking. I think the stock will continue to move higher over the course
of the year as AOL continues to add subscribers and books large
advertising contracts. I think that AOL is the one blue chip stock in the
Internet sector and should be purchased at these levels.
Q: Can BarnesandNoble.com catch up to Amazon.com?
A: I don't cover BarnesandNoble.com, but I do follow Amazon. I think it
will be very difficult for another online bookseller to have much success
competing against Amazon because of its established Internet brand
name.
Q: Would you buy Yahoo?
A: Right now we rate Yahoo as a hold. The company has a very
profitable business model, but its valuation is not attractive at current
prices.
Q: Should I sell my sell Ascend shares or take shares of Lucent
when the merger is completed?
A: At this point, with the merger expected to close in a few days, there is
very little spread between Lucent and Ascend. Therefore, there is not
much of an opportunity for an investor to benefit from the merger
transaction itself. Right now, S&P rates Lucent as an accumulate, or
four-stars.
Q: Who seems most likely to benefit from the move to high-speed
broadband Internet access?
A: There are a number of companies that will benefit from this trend. On
the equipment side, companies like Nortel Networks and Lucent are well
positioned to exploit this opportunity. On the Internet side, @Home
appears to be well positioned for this market. But don't count out AOL.
Q: What do you think of Alcatel?
A: This French communications equipment company has struggled due to
its reliance on selling circuit switch technology. In response, it has made a
number of acquisitions in the data networking field in order to grow
revenues at a faster rate. I think it is too early to tell if these acquisitions
will ultimately pay off. We rate it a hold.
Q: Have you heard of a new piece of equipment under
development at GTE that would attach to a regular phone line and
increase modem speed to comparable or above cable capacity?
A: Our communications service analyst ranks GTE an accumulate. I have
not heard of exactly what GTE is working on, but there is a competing
technology to cable modems currently being worked on called DSL
(digital subscriber line). This technology will enable high-speed access
over existing phone lines. Alcatel is a major player within both the United
States and Europe in terms of DSL equipment. Other companies with
DSL products include ECI Telecom, ADC Telecom, and Adtran.
Q: How is Ericsson doing in the equipment race?
A: Ericsson has struggled over the past year or so due to heavy emerging
market exposure as well as an older line of wireless phones. However,
Ericsson has started to perform better this year as some of the emerging
market economies have solidified. The company is also poised to release
a new line of wireless phones, which should help it be more successful
within the industry. We rate Ericsson an accumulate.
Q: Have you heard any rumors of merger activity regarding
EarthLink?
A: There were a lot of rumors surrounding EarthLink today. The most
prominent rumor was that the company was going to be acquired by
Gateway. I do not believe that these rumors are true, because EarthLink
has a very significant relationship with Sprint and an acquisition by another
company could put that relationship at risk.
Q: Can you suggest ways for investors to share in the spectacular
growth of E-commerce?
A: One interesting way to play the growth of electronic commerce is
Sterling Commerce (SE). The company provides software that enables
E-commerce between businesses. S&P currently rates the stock as an
accumulate.
Q: What do you think of the argument that stocks such as AOL
and Lucent are so highly priced that investors should beware? Or
is there still a lot of growth potential there?
A: The reason that these stocks are highly priced relative to most other
stocks is their growth potential. I believe that for both AOL and Lucent
there exist significant growth opportunities mostly related to the Internet.
The one cautionary note that I have about most highly valued stocks has
to do with interest rates. Should rates continue to climb these stocks
would be vulnerable to a correction.
Q: As an analyst of Net stocks, what measures do you apply? By
many traditional measures, such as price-earnings ratios, most
such stocks would be out of bounds. What tools do you like to use?
A: One relative measure that I like to use is price-to-sales. This ratio
tends to be higher for those companies that can command high margins.
Therefore, you would see a company like Yahoo have a much higher
price-to-sales ratio than a company like Amazon, which has very low
margins.
Q: What are your top picks among Internet and communications
equipment stocks?
A: In communications equipment, our top picks are Qualcomm
(QCOM), Nokia (NOK), Nortel (NT), and ECI Telecom (ECILF). The
current environment within this sector is very positive for this group.
Worldwide competition is fierce within the communication service
provider market. Therefore, service providers must look to upgrade and
enhance their existing communications networks. In order to accomplish
this they must turn to equipment vendors such as Nortel or ECI telecom.
From the wireless standpoint, the number of wireless subscribers
continues to grow at an extremely fast pace. Therefore, the demand for
wireless phones such as those manufactured by Nokia and Qualcomm
should continue to be high.
My two top picks within the Internet sector are AOL and EarthLink. Both
of these companies stand to benefit from the increasing number of people
who wish to go online. This trend has partially been driven by the sharp
decline in PC prices. The number one reason for purchasing a PC today is
to go on the Internet. Additionally, EarthLink, and especially AOL, will
benefit from the increasing number of companies that wish to advertise on
the Internet. The easiest way for a merchant to reach a mass audience
over the Internet is to enter into an agreement with AOL.
EDITED BY LORI BONGIORNO _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
BACK TO TOP
Advanced Charts for BW
subscribers
Street Wise
barker.online
Not-So-Neutral Corner
Sector Scope
Assistive Technology
Inside Wall Street
Washington Watch |
