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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: DOUG H who wrote (59532)	1/4/2000 9:17:00 PM
From: Ruffian	Read Replies (2) \| Respond to of 152472

1/04/00 - Qualcomm a risky fund you may own without knowing it Ahem ... just a note to all you Qualcomm shareholders (which may mean you whether you know it or not): Would I be a party pooper to mention an ancient, 20th-century notion such as earnings? In case you've been hiding in a Y2K bunker and not getting the news, Qualcomm Inc. is the soaring San Diego telecom equipment maker with patents on cell-phone technology that is becoming the standard. A year ago, its shares were trading at a price, adjusted for subsequent splits, of about $7. It finished 1999 at $176.125, for an annual gain of about 2,600 percent _ the biggest gain in the Standard & Poor's 500 for 1999. Last Wednesday alone, the stock surged 31 percent when a PaineWebber analyst predicted it would double in a year. Then, at the opening Monday, it jumped to $200 before settling back and closing at $179.31, up $3.19, in trading of 45.6 million shares, by far the day's most active Nasdaq stock. Is this irrational exuberance, or what? In fairness, I should note that Qualcomm is a substantial company, one that actually makes money. These days, investors _ or perhaps I should say speculators _ are drunkenly bidding up prices of Internet and other high-tech companies that don't earn any money at all. These folks are thrilled when a company projects not that it will make a profit, but that its losses might just get a bit smaller in a few years. Some hot stocks rise even though losses are expected to get bigger _ because speculators figure the company is spending more to develop and advertise its service, and that this will pay off someday. So it's nice to know that Qualcomm actually earned 62 cents a share from continuing operations for the year ended last September. Nonetheless, that means the ratio between its share price and annual earnings is about 291 to 1, a staggering level. That's 10 times the P/E ratio for the Standard & Poor's 500. Traditionalists worry because the S&P is twice as high as its long-term P/E average of about 15. Even if Qualcomm's earnings rise to $1 a share, which is what analysts have forecast for the next year, the P/E will be about 176. The only reason to own a business, which is what stockholders are doing, is to share in profits. The only reason to own a 300 P/E stock is that you think its profits eventually will rise to beat earnings on alternate investments. At 300 to 1, Qualcomm is earning 0.33 percent, about one-tenth what you can get in a savings account. OK, so we know Qualcomm is a risky stock. Anyone who buys it knows that going in, right? Why should we lose sleep worrying about what will happen to these gamblers? Because some of these high-wire artists are us _ investors who would never think of buying a 300 P/E stock. Qualcomm is a darling with mutual fund managers, so lots of us fund owners are loading up on it unknowingly. Even us sober index fund investors are exposed. Qualcomm accounts for about 1 percent of the S&P 500 index and nearly 8 percent of the Nasdaq 100. And Qualcomm is just an example. Many other high-risk stocks are working their way ever deeper into mutual fund portfolios, adding risk. For a 300 P/E stock to fall back to a still high but less risky P/E of, say, 100, its earnings would have to triple, or its share price would have to fall by two-thirds. At the moment, it's not possible to evaluate the role mutual funds have played in bidding up Qualcomm's price. Funds report their holdings only twice a year, and the most recent data for most funds is 6 months old. But in a few weeks, investors will begin receiving annual reports listing fund holdings on Dec. 31. It's a safe bet many funds that didn't own Qualcomm six months or a year ago will report they had it at the end of the year. Is that good? If the fund bought low and rode along as the shares skyrocketed, it's great. But many fund managers probably hurried to buy Qualcomm at the end of the year so they could trick investors into thinking the fund's stock pickers were on the ball all along. Such heightened demand probably helped push Qualcomm up. Managers who bought at the inflated year-end prices took a big risk with investors' money. If Qualcomm falters and those managers start dumping it, the bloated supply and diminished demand could cause the price to plummet, damaging fund returns. The widespread practice of ''window dressing'' fund portfolios at the end of the reporting period is sleazy and should be curbed. That would happen if regulators required funds to report more often, and more thoroughly, about when they acquired large blocks of shares. Even if these reports were made months after the fact, giving funds time to build or reduce holdings without tipping off the market, detailed disclosures would allow us to identify managers who are the worst offenders. That would discourage the practice and, perhaps, reduce some of the dangerous volatility that excessive speculation has put into the market. (Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at jeff.brown(at)phillynews.com) (c) 2000, The Philadelphia Inquirer.